Standing Committee B

[Mr. Frank Cook in the Chair]

Finance Bill

(Except clauses 11, 18, 40, 43, 44 and 69 and schedule 8) - Clause 24 - Deduction cases

Amendment proposed [this day]: No. 15, in clause 24, page 21, line 4, leave out from 'the' to 'that' in line 5 and insert 
'Special Commissioners find, on the balance of probability, following an application by the Commissioners for Her Majesty's Revenue and Customs'.—[Mr. Philip Hammond.] 
Question again proposed, That the amendment be made.

Frank Cook: I remind the Committee that with this we are taking the following amendments: No. 16, in clause 24, page 21, line 5, leave out 'or may be'.
No. 31, in clause 24, page 21, line 18, leave out 
'or one of the main purposes'. 
No. 30, in clause 24, page 21, line 20, leave out from 'question' to end of line 21 and insert 
'is significantly greater than it would have been if the relevant transaction was part of a qualifying scheme.'. 
No. 17, in clause 24, page 21, line 23, after second 'the', insert 'Special'. 
No. 18, in clause 24, page 21, line 26, at beginning insert 'Special'. 
No. 19, in clause 24, page 21, line 30, after 'the', insert 'Special'. 
No. 20, in clause 26, page 24, line 5, leave out from 'the' to 'that' in line 6 and insert 
'Special Commissioners find, on the balance of probability, following an application by the Commissioners for Her Majesty's Revenue and Customs,'. 
No. 21, in clause 26, page 24, line 6, leave out 'or may be'. 
No. 22, in clause 26, page 25, line 5, after second 'the', insert 'Special'. 
No. 23, in clause 26, page 25, line 8, at beginning insert 'Special'. 
No. 24, in clause 28, page 25, line 37, leave out from 'the' to 'give' in line 38 and insert 'Special Commissioners'. 
No. 25, in clause 28, page 26, line 5, at beginning insert 'Special'. 
No. 26, in clause 28, page 26, line 9, at beginning insert 'Special'. 
No. 27, in clause 28, page 26, line 12, after 'the', insert 'Special'. 
No. 28, in clause 28, page 26, line 23, after third 'the', insert 'Special'. 
No. 29, in clause 28, page 26, line 24, leave out 'have been reasonably' insert 'reasonably have been'.

Dawn Primarolo: At the end of the morning sitting, I was explaining the effect of the amendments and why they are therefore not acceptable to the Government. An important aspect of the arbitrage legislation is that it does not set out an all-or-nothing approach. If a company receives a notice under the legislation, it must consider first whether the legislation applies to it and, if it does, how great an effect the legislation has on its self-assessment. The company takes its own view of both matters in its self-assessment. If there is a disagreement between Her Majesty's Revenue and Customs and the company, and it cannot be resolved, the matter can proceed to the special commissioners, who will be able to consider not only whether the legislation applies at all, but the extent of its effect.
The amendments would bypass the self-assessment stage. Instead, the matter would proceed directly to a hearing at the special commissioners to determine whether a notice should be issued. That unprecedented approach would require the special commissioners, who are established as a body to hear appeals, to apply legislation directly in the first instance. It is not clear how an appeal against the special commissioners' view would proceed. As I said this morning, there is no advantage in the huge increase in bureaucracy and costs that the amendments would impose. 
There is already a right of appeal when the parties disagree, and there is nothing to be gained by requiring a hearing irrespective of whether disagreement exists. I hope that my explanation has dealt with the worries of the hon. Member for Runnymede and Weybridge (Mr. Hammond), but I shall be happy to give him further reassurance. HMRC has said in published guidance that companies may make what are referred to as a point of principle referral to special commissioners on aspects of the arbitrage legislation. A point of principle referral allows a point to be considered separately from other self-assessment matters and can be heard as soon as the relevant facts have been established. 
Unlike the special commissioners' referral in the amendments, the point of principle referral would include the extent of the effect of the legislation as well as whether it applied at all. I hope that the hon. Gentleman is reassured that the issuing of the notice supported in the guidance notes with the point of principle referral gives sufficient opportunities, without the additional bureaucracy and possible cost, for the matter to be considered. It would also leave in place the special commissioners' role to hear any subsequent appeals.

Philip Hammond: I might have misunderstood the Paymaster General. I am grateful to her for what she said, but she seems to be outlining the existing procedure for resolving a dispute about a company's return or its assessment after it has responded to a notice. We want to provide a mechanism for appealing against the issue of a notice when it was not appropriate to have issued a notice. I do not think that anything she has said would allow an appeal against the issue of a notice; it  would only allow an appeal against the Revenue's view of what the outcome would have been.

Dawn Primarolo: I repeat what I said about the working of the point of principle referral. That allows a point to be considered separately from other self-assessment matters, so it can be heard as soon as the relevant facts are known. The point of principle referral will therefore include the extent of the effect of the legislation as well as whether it applied at all. That mechanism, with the referral once the self-assessment processes have been completed, establishes an appeal procedure. The amendments would remove all of that: the issue of every notice would go automatically to the special commissioners, even when there is not a dispute. That would force many claims to be considered and, therefore, much more administration and legal work.

Philip Hammond: The Paymaster General says that the amendment would remove all of that. With respect, it would do no such thing. All of what she has just set out is in the guidance notes rather than in the Bill. We are seeking to put a mechanism on the face of the Bill. Does she accept that that is the purpose of these amendments?

Dawn Primarolo: I have said that there is no need to appeal the notice because all the notice does is tell the company that it needs to consider the legislation; that is all that it requires. It is then up to the company to decide whether to take any further action. The hon. Gentleman is putting too much emphasis on the issuing notices.

Philip Hammond: Fishing expeditions.

Dawn Primarolo: No, they are not fishing expeditions. The hon. Gentleman has said that before. The legislation is clear about the tests. All—not nearly all, but all—of conditions A to D have to be met.

Philip Hammond: Or may be.

Dawn Primarolo: I shall come to that point later. The notice is issued if the Revenue is of the opinion that it should be, and the notice requires that the company takes the legislation into consideration.

Philip Hammond: I know that the right hon. Lady is taking the line that the issue of a notice does not really matter—that what happens next is what matters, but is she saying that there is no mechanism by which a notice could be rescinded, even if an appeal on a point of principle was made and the Revenue lost? If that happened, would the notice be rescinded or would it remain in force? Taxpayers need protection against fishing expeditions. They need to be able to demonstrate that the Revenue was wrong to issue a notice. That is the point of having a mechanism by which notices may be rescinded or overturned.

Dawn Primarolo: The issue of the notice to the company only requires the company to take the legislation into consideration. If the company receiving the notice believes that HMRC was wrong and that the conditions are not met, it will make a self-assessment on the basis that the arbitrage legislation does not apply. If HMRC agrees, that will be the end of the matter. If HMRC does not agree and the matter  cannot be resolved by discussion and agreement, it can proceed to the special commissioners for a decision. That is consistent with the special commissioners' usual role, which is to hear appeals. In that way, the notice is issued if the conditions are satisfied in the view of HMRC.
The notice requires the company specifically to take note of the legislation. It is a signpost that reads, ''Take note of the arbitrage legislation when completing your self-assessment''. In our system, the company takes note; if it believes that the conditions do not apply, it makes its self-assessment on that basis and the normal processes within the tax system proceed from there. HMRC will decide whether it agrees with the company's self-assessment.

Rob Marris: The application on the point of principle is set out in the guidance notes. Will the notice issued to the company also signpost the fact that such an application may be made? That is not in the Bill; it would be helpful if it were signposted to companies when they received the notice that that avenue was open to them.

Dawn Primarolo: Discussions with companies and the consultation with companies and a wider group of interested parties on the guidance notes has ensured that the notes are clear on a range of issues, including the point of principle. There is no indication that that point of principle provision needs to be in the Bill; the interaction between the legislation and the guidance notes is established and fully understood. If, within the procedures that I have set out, the special commissioners decided, there would be no need to rescind a notice. They would have decided, and that would also be the end of the matter.

Brooks Newmark: I should like to clarify one point. I appreciate the detail with which the right hon. Lady has gone into this issue, but I am still not clear. If clearance were given, would that be a binding commitment? If it were not binding, I suggest that that would still leave the degree of uncertainty that we are concerned about.

Dawn Primarolo: The clearance is binding. If a company has approached the Revenue and gone through the clearance procedure in place as a result of the provisions, and if the HMRC makes a decision, that decision is binding. However, we shall come to that in more detail when we reach other amendments and clauses. Perhaps the hon. Gentleman will pursue his question then about the difference between the statutory clearance and the clearance procedures now in place. [Interruption.] Perhaps we could save that for the debate on clearance, when I shall be happy to give way to the hon. Gentleman.

Frank Cook: Order. Perhaps hon. Members could make their comments through the Chair. On several occasions today, a kind of verbal shuttlecock has been going on. That is against the rules; comments should be made through the Chair, please.

Dawn Primarolo: In his opening remarks, the hon. Member for Runnymede and Weybridge described the second set of amendments as sub-group two. Amendments Nos. 30 and 31 are not directly  concerned with the issuing of notices. They relate to the conditions that determine when the legislation applies. The legislation sets out conditions A to D. Condition D limits the legislation to cases in which tax deductions arising from the scheme are of more than a minimal amount. Amendment No. 30 would replace condition D with a new one based on a comparison of tax effects with or without the arbitrage system. Condition C already requires that the main purpose, or one of the main purposes, of the scheme is to achieve a UK tax advantage.
As explained in the guidance, that condition requires a comparison to be drawn between tax deductions that arise under the scheme and those that would have arisen in the absence of the scheme. It appears that amendment No. 30 is intended to make the same comparison. If that is its intention, I am happy to give reassurance that condition C already requires a comparison to be drawn, but the same result is not achieved by the amendment as drafted. Let me explain why.

Philip Hammond: Will the Paymaster General give way?

Dawn Primarolo: Perhaps, through you, Mr. Cook, I could explain why the amendment does not give the deduction. When I have completed that I will give way to the hon. Gentleman.
 The amendment requires the question to be asked whether tax deductions would have been less if a transaction had not been included in a scheme, but it appears to assume that the transaction itself stays the same. On that basis, it is hard to see why tax deductions would have been different. It appears that the amendment would cause the legislation to have no effect. It does not address the key question of whether the existence or nature of a transaction is changed because of the arbitrage scheme. The amendment seeks to draw a comparison without reference to the purpose of the scheme. That is at odds—putting it politely—with the aim of the legislation, which is to tackle tax avoidance. Condition C identifies avoidance through a purpose test and the use of comparison arises naturally from that test, so I am satisfied that the intention of the amendment is served by condition C and that nothing further is required in terms of the comparison. 
Like amendment No. 30, amendment No. 31 alters one of the conditions that must be met for the legislation to apply. It would limit the scope of the legislation so that condition C would be met only if the main purpose of the scheme was to achieve a UK tax advantage; it would not be met if that was one of the main purposes of the scheme. That would severely weaken the legislation and lead to unfair results, because schemes can have mixed purposes. Apart from the practical difficulties of determining which is the main purpose in such cases, it would be unfair if legislation applied differently to different schemes with mixed purposes compared with those with a single purpose. 
I will give an example. Let us suppose that 51 per cent. of a loan is used for a wholly commercial purpose, such as acquiring new business premises, but the other 49 per cent. is used for an entirely artificial tax avoidance purpose. On the basis of the amendment, the avoidance would go unchecked. Without the amendment the clause would leave tax deductions in place for the 51 per cent. of the business use of a loan. Only that relating to the tax avoidance purpose would be identified. That is right and it will give the right result. It would be wholly unfair if, as a result of the amendment, tax avoidance was left unchecked where there is a mixture of purposes. I hope that I have been able to give the hon. Member for Runnymede and Weybridge the assurances he seeks. We oppose and reject the group of amendments. 
The hon. Gentleman discussed amendment No. 29, would omit ''have been reasonably'' and insert ''reasonably have been''. Such an alteration does not change the legislation. I accept that he prefers the grammatical construction. If it is possible to remove amendment No. 29 from the group and deal with it separately, I have no objections to it, but the remaining amendments in the group are unacceptable. If the hon. Gentleman chooses to put them to a vote, I will ask my hon. Friends to oppose them.

Philip Hammond: I am grateful to the hon. Lady for throwing me that small crumb so early in the proceedings. She might not know, because she has been a Treasury Minister for a long time and I have not served on a Finance Bill Committee since 1998, that I usually like to find something that is uncontroversial enough for Ministers to agree to and it usually has something to do with the grammar or architecture of Bills.
I should say for the record that I wanted to intervene on the Paymaster General when she was using precious breath to denounce amendment No. 30 to tell her that I entirely agree with her. I said in my opening remarks that I did not intend to speak to that amendment because it is otiose and would not do anything to the Bill. That probably reflects the fact that this is such a complex part of the Bill that, even after spending time with specialists who understand this stuff and producing amendments, on returning to the amendments the night before a sitting or early in the morning to consider the points one will make in the debate, one sometimes finds that they are not as good as they first appeared. 
The Paymaster General's answer to amendment No. 31 is superficially appealing. This is a complicated subject and I am afraid that in the two minutes I have had to think about it I cannot digest her answer fully, but I accept what she says and will go back to others who have commented on the matter and see whether her comments satisfy their concerns. 
I shall return to a couple of points that the Paymaster General made earlier, on which I intervened but did not get a specific answer. She said that the rules would apply only where a company sought to exploit contrived arbitrage arrangements. I asked whether that means that the rules would always not apply where the arbitrage arrangement was not  contrived—for example, where it was necessary because of a regulatory issue, such as the separation of regulatory capital into a separate entity. Is she saying that as long as that test is complied with, the arrangement is not a contrived arbitrage arrangement and will always fall outside the rules?

Dawn Primarolo: I apologise for not dealing with that issue. I am happy to reassure the hon. Gentleman. The matter is covered in the guidance published by HMRC alongside the publication of the Bill. The issue arises in the context of what is referred to as tier 1 regulatory capital and bands. It is unlikely that the arbitrage legislation will apply to tier 1 capital, because it applies only to schemes that are achieving, as the hon. Gentleman said, a UK tax advantage. I have met organisations that are particularly interested in the matter and I have made that point directly to them.

Philip Hammond: I am grateful to the Paymaster General for making that clear, and I know that the others outside this Room will be pleased, too.
The Paymaster General, in responding to something that I apparently said—that the amount of revenue at stake was modest—said that the loss was not small because, to use her words, two thirds of all investment in the UK comes via hybrids. I still do not quite understand the significance of that point. She is, presumably, not suggesting that all hybrids will be caught by this legislation. Even if one accepts her argument, there does not seem to be any logical connection between the proportion of investment in the UK that comes via hybrids and the size of the loss.

Dawn Primarolo: Obviously I did not make the point very well. The hon. Gentleman knows the figures for the revenue. Personally, I do not consider £200 million to be a minor sum, or small beer, as I think he said, especially as it adds up to £600 million over three years. I was using the two thirds example to demonstrate the potential risk to the Exchequer. I was not saying—I went on to make this clear in my comments about arbitrage—that all such investment was therefore suspect, but that there are potential risks in those very complex arrangements. If I muddied the waters by using that example, I apologise for misleading the hon. Gentleman.

Philip Hammond: I am grateful to the Paymaster General for clarifying that. It is probably useful for everyone that that point is on the record.
The right hon. Lady acknowledged that there is nothing wrong with arbitrage per se, but she said that its use has led to distortion of taxpayer behaviour. No specific examples of that have been given in Committee, although I am aware of some cases. It is important to make it clear that the legislation is not an attack on arbitrage arrangements across the board. It is also important that when the Paymaster General speaks of distortion of taxpayer behaviour, it is clear that she is not talking about standard financing structures that have been in place for many years, some of which may now fall foul of this legislation, as far as I can see. I hope that the right hon. Lady can confirm that she is looking into only the most aggressive use of hybrids—their use in a way that has not been part of the mainstream conventional  financing route. In that way, she will reassure large and long-established companies in the United Kingdom, including some that are American-owned. I do not want to name names because people are sensitive about these things, but I have spoken to several large US-owned corporations, long-established in the UK, that are very large employers, and that have used arrangements that may appear to fall within the ambit of this legislation. It is important to reassure them and send them a message that this is not an attack on their financing structures.

Dawn Primarolo: I am happy to give the hon. Gentleman that reassurance and to restate what I said at the beginning of the debate. Under the disclosure regime that is in place for detecting any unrevealed avoidance in the tax system, the rules will apply only in cases where there is a tax advantage. That is what we are responding to. I know that the hon. Gentleman will not want to go into detail—I understand, as I have heard the same detail myself—but I think that I can give him the reassurance that he seeks.

Philip Hammond: I am sure that the right hon. Lady and I heard the detail from the same people. She says that the rules apply if a tax advantage arises. We keep coming back to that phrase, and the best place to deal with it is probably under clause 25. The nub of the test will be how that tax advantage is defined in practice, and how the necessary comparison is carried out.
I asked the Paymaster General whether she could give an idea of the number of notices that the Revenue expects might be issued, so that we would know what it is gearing up to do. I think that the answer I received was that, in an ideal world, she would hope to issue no notices. That suggests that the wide scope of the legislation is intended to have a deterrent effect, possibly across a broad sweep. That would be unfortunate, but I know that she is very keen on deterrents. Clearly, my obsession with fishing expeditions will become difficult to sustain if she envisages a couple of dozen notices being issued each year, but if she envisages a couple of hundred, I am on firmer ground. Therefore, it would be helpful if she could say something about the assessed scale of the problem. 
Let me explain why I am pursuing this line. The Paymaster General also told the Committee that she had identified two multinational groups that were unwinding arrangements because they would fall within the scope of the legislation, and that they would, in aggregate, have produced an additional £150 million of taxable profits—that is, all else being equal, £45 million of UK corporation tax payable. That is an interesting amount, because the Government's own figures suggest that the total yield from this tax will be less than £200 million. If £45 million will be raised from just two corporate groups, that suggests that this piece of legislation might be targeted at a small number of arrangements that are already known to the Treasury or the Revenue, and which are operated by a small number of parties. 
Can the Paymaster General tell us where the £200 million figure comes from? I appreciate that it is  difficult to make an exact estimate, but an estimate of £200 million has been made. I think that that sum includes arbitrage and financial arrangements that are caught by schedule 7; the Paymaster General will correct me if I am wrong on that. Let me try to put this in the right context; there are two groups of companies with £45 million extra to pay, and an overall yield of £200 million extra. Perhaps that helps us to get an idea of how many notices there might be—of whether the target group is narrow or wide. 
I am grateful to the Paymaster General for her response. I will not press the amendment to a Division, as I am largely happy with what she has said, and we can address matters about which I was less happy on later occasions. However, in view of what she has said, I would like to ask for a separate vote on amendment No. 29. I beg to ask leave to withdraw the amendment. 
Amendment, by leave, withdrawn.

Philip Hammond: I beg to move amendment No. 58, in clause 24, page 21, line 32, at end insert—
'(8A) No notice may be issued pursuant to this section in respect of any transaction which is subject to the operation of any anti-avoidance provision already in force at the date of coming into force of this chapter. 
(8B) For the purposes of subsection (8A), anti-avoidance provisions include but are not limited to Chapter II of Part VI of ICTA, Part XVII of ICTA, and paragraph 13 of Schedule 9 to the FA 1996.'.

Frank Cook: With this it will be convenient to discuss amendment No. 59, in clause 26, page 25, line 18, at end add—
'(14) No notice may be issued pursuant to this section in respect of any transaction which is subject to the operation of any anti-avoidance provision already in force at the date of coming into force of this chapter. 
(15) For the purposes of subsection (14), anti-avoidance provisions include but are not limited to Chapter II of Part VI of ICTA, Part XVII of ICTA, and paragraph 13 of Schedule 9 to the FA 1996.'.

Philip Hammond: Amendment No. 58 deals with clause 24 on the deductions case, and amendment No. 59 deals with clause 26 on the receipts case. They would make a transaction that is already subject to the transfer pricing, thin capitalisation or general anti-avoidance rules in the Income and Corporation Taxes Act 1988, the Finance Act 1996 and other generic legislation not subject to a notice. In other words, when the transaction is already caught by legislation that is already in force, the Revenue should not be able to issue a notice under the Bill. There is a worry that the body of tax law is growing at a frightening pace. In 1997, the standard tax experts' guide comprised two volumes. It is now four volumes. Tax statutes are growing at an alarming rate. It is partly the scale and complexity of the tax code that allows people to devise and develop complex loopholes. We and others are concerned that, each time the Revenue has a new idea for closing a particular loophole, the approach taken is to layer a new tier of legislation with wide applicability on top of what already exists. That is the wrong approach.
The amendments would establish a priority for the application of different provisions, and that would be  appropriate. They would reduce an unnecessary compliance burden on business by limiting the circumstances in which the Revenue could issue a notice. We want to draw attention to the fact that, in its present form, the vast majority, if not all, of the legitimate targets that could be hit by the Bill are covered already by thin capitalisation transfer pricing and the loan relationship rules under paragraph 13 of schedule 9 to the Finance Act 1996. 
The Paymaster General has come armed. She has diagrams in front of her, so perhaps she can give the Committee an example of a scheme that will be properly caught by the application of the deductions rule, but not caught by the application of those other well established tax rules. The correct route to follow is first to identify the mischief that is being attacked. I am still not sure whether we know clearly what that mischief is. Secondly, the existing legislation must be checked to see whether it applies and works. Incidentally, if it does not work and does not have wider applicability, let us get rid of it so that tax law is just not layered on top of tax law. Thirdly, after proper consultation, new legislation can be introduced that deals with the problem. 
The measures have given rise to concern and uncertainty in the business community, members of which naturally assume that, when the Government swing into action and legislate, there is a new target that is not caught by the existing rules. Although the Government have made reassuring noises about the narrow focus that is intended under the Bill, it is not easy to ascertain a target that is not already caught by existing legislation and that could, within the scope outlined outside the Bill, be hit by the new provisions. Will the Paymaster General clarify who gets hit under the Bill who is not already hit under existing legislation?

Brooks Newmark: I suggest that we apply a fourth test that concerns the estimated reduction in investment in the United Kingdom as a result of the Bill and the number of jobs that will be lost. In addition, the additional revenue that could be lost should be taken into account.

Philip Hammond: My hon. Friend makes a powerful point. On a more general point, one of the concerns that has been expressed—I hope the Paymaster General will recognise how this arises—is that the Revenue has a job to do. It is charged with ensuring that it collects all the tax that it is supposed to collect, closes the tax gap and closes tax loopholes. It is very focused on collection.
Any Chancellor—I am not making a political point—has a need for a certain amount of cash and the order goes out to the Revenue that an extra so much is needed next year. The question is whether there is ministerial or official oversight at an appropriate level that joins up that agenda with other important aspects of Government policy, such as the promotion of economic growth, job creation and a stable economic environment. It is important that short-term tax gain is not allowed to drive an agenda that could be to the detriment of the medium to long-term health of the UK economy. My hon. Friend makes a good point.

Frank Cook: It might be as well if I were to inform the Committee that as we have discussed every runner on the deduction case racecard, the Chair is not well disposed to any suggestion of a clause stand part debate. Members should say anything that they need to say on this matter now.

Dawn Primarolo: Let me start by reminding the Committee that this legislation is designed to stop contrived avoidance structures that are set up specifically to exploit the arbitrage opportunities in order to obtain a UK tax advantage. HMRC is aware that that is going on—we have not dreamed it up—through disclosure of schemes to achieve exactly that result. The legislation responds to those disclosure regimes.
When the hon. Member for Runnymede and Weybridge touches on the competitiveness and fairness of the UK economy, perhaps he would also like to address the question of whether the situation is fair to those taxpayers who comply, do not use those contrived schemes and make their contribution according to Parliament's decisions. Damage to competitiveness when some companies can use the schemes and others cannot is unacceptable. 
I cannot believe that the Opposition are suggesting that the UK's competitiveness should be predicated on the ability of companies to avoid paying UK tax. That cannot be sensible. If that is not the case, the question of competitiveness arises on the basis of whether the tax system is modern and fair and whether it has appropriate rules that respond to the challenges that it faces in order to discharge the responsibility to all taxpayers to ensure fairness in the system. As we have heard in the debate so far, that is precisely what the clauses seek to achieve. 
The Opposition keep going round the houses, but they have to address the question. Disclosure schemes show that those contrived avoidance schemes are being marketed. In previous debates, I have explained that legislation is not necessarily the route; one could make an assessment or use litigation. However, in these cases, legislation was necessary. Although it is absolutely right to probe that legislation, to question whether it should exist—in the sure knowledge that schemes have been disclosed that would achieve the very outcome that the clauses seek to prevent—is a dereliction of the duty of this Parliament to all its taxpayers.

Brooks Newmark: I draw the Paymaster General's attention to a very practical quote that I used during the original Finance Bill. Professor J. K. Galbraith, an old professor of mine, said:
''Politics is not the art of the possible. It consists in choosing between the disastrous and the unpalatable.'' 
Unfortunately, those of us who live in the real world have to accept facts. I fully appreciate the direction in which the Paymaster General is going; there is a need to balance the casting of the net of anti-avoidance legislation wide enough to prevent circumvention with the need to maintain a competitive economy. Notwithstanding that, I remain very concerned; those of us who have worked in the real world fear  that Britain's competitive advantage today will be lost if the right hon. Lady continues in that direction.

Dawn Primarolo: The hon. Gentleman has made exactly the point that I posed to him. He says that competitiveness is predicated on allowing some to avoid tax; that is not acceptable. If he looks at any assessment of the UK economy's competitiveness, he will see—and I know that he knows this—that it is highly competitive.
If the hon. Gentleman is saying that one should not be complacent about competitiveness and that it always has to be part of the consideration, I agree with him entirely. However, we come back to the central question, which I shall address. When the tax authorities and the Government have been notified of schemes being marketed that are unfair and contrived avoidance schemes that use particular methods to reduce or eradicate UK tax payments, the Government and the authorities have to act. That is what we are doing here.

Philip Hammond: On the point about competitiveness, the Paymaster General cannot afford to be complacent because she knows that, under this Government, the UK has slipped in the international competitiveness league from fourth to 11th place. There are certainly no grounds for complacency there.
Of course, we accept the principle of what she is saying about identified avoidance cases. I have asked her for an example of a case that would be caught by this legislation and would not be caught by existing legislation. Well qualified observers in the real world fear that this is a belt-and-braces approach and that there are few, if any, cases falling within the deductions case of clause 24 that could not be dealt with effectively by the loan relationships legislation, the thin capitalisation rules and other anti-avoidance provisions.

Dawn Primarolo: That point does not stand up; it is totally illogical. If that were the case, why would schemes be sold at exorbitant cost and be on the market? If companies structure themselves in such ways, they will reduce their taxes.
I will not start giving tax advice to multinationals in this Committee or discussing complicated financial structures. The information comes from disclosure; the consultation on the guidance notes has been quite clear; and the examples in the guidance notes have also been consulted on. The companies that I have met have concerns about the operation of the rules—some of which we have addressed and others that we will deal with during the course of discussion—as they always do with new procedure. However, a number of those companies have accepted that there are issues and it is right for the Government to act on that basis. 
There is no need for the hon. Gentleman's amendment. The overlap between different anti-avoidance rules is commonplace and is generally a good thing, because it stops transactions deliberately taking advantage of the unintended gaps. In practice, the overlap does not lead to problems. That is not just the experience of the UK tax authorities, but is  common practice in those of the industrialised economies.

Brooks Newmark: Exactly addressing the issue of our international competitiveness and what goes in the EU—our arrangements with the EU countries and the United States—can the Paymaster General confirm that these clauses will not, for investment to and from the rest of the EU, be contrary to the freedom of capital and establishment articles of the treaty of Rome? Will she confirm also in respect of inward investment from the United States that the clauses will not be contrary to the non-discrimination article of the US-UK taxation treaty so carefully negotiated a few years ago?

Dawn Primarolo: Yes, I can give the hon. Gentleman that confirmation.
The amendments would undoubtedly open large loopholes in the legislation that could undermine the whole impact of what we are proposing. I shall give an example that the hon. Gentleman touched on. Take the transfer pricing rules—I am sure that Committee members think of nothing else—that are contained in part 17 of the Income and Corporation Taxes Act 1988 and are included in the list of anti-avoidance rules in the amendments. All transactions between connected persons are subject to transfer pricing rules, so the amendments would exclude all connected party transactions from the scope of the arbitrage legislation, which is unacceptable. 
I note that the phrase ''subject to'' is not defined in the amendment, but even if it were limited to cases where other anti-avoidance legislation had some effect, the amendments would still lead to unacceptable limitations on the scope of the legislation. For example, it would be a simple matter for a company to ensure that the transfer pricing legislation had a small effect to ensure that the arbitrage legislation did not apply at all. That cannot be allowed. 
There may be overlap between the arbitrage legislation and other anti-avoidance rules and, in some cases, all the anti-avoidance resulting from an arbitrage scheme may be cancelled by other laws, in which case the arbitrage legislation would have no further effect and no notice would need to be issued. In other cases, part of the avoidance may be cancelled by other rules, but a notice is still required to cancel the avoidance that results from arbitrage. 
It is important to emphasise that there is no possibility of the arbitrage legislation applying in such a way as to introduce some sort of double charge on the company concerned, because its effect is limited to cancelling tax avoidance and it rules out any risk of double charge. The amendments are therefore unnecessary and potentially damaging to the legislation. I ask my hon. Friends to oppose the amendment, should the hon. Gentleman decide to press it to a Division.

Philip Hammond: The Paymaster General says that there is no danger of a double dip for the tax authorities. As she has raised the subject, perhaps I should start by asking her about a point that I wanted  to come to much later. Is there no circumstance in which a deduction would be disallowed because the amount was also deductible in another jurisdiction, but where that deduction was offset because the corresponding income was also being taken into account in that other jurisdiction—for example, in a US tax consolidation? I do not know whether I have explained that sufficiently well for her to respond to it, but that is a concern that I wanted her to clarify. Is there any possibility of that happening through the other half of the double deduction being offset by the consolidation of a matching and offsetting item of income?
I rise again because you have suggested that you do not intend to allow a stand part debate, Mr. Cook. There are a few other issues of general application to this clause that I wanted to raise with the Paymaster General, and one or two quotes that I wanted to read into the record to help to set the overall scene. I emphasise that, as has become the practice for many Bills, we are dealing under the first clause of a chapter with many of the generic issues that will perhaps arise repeatedly throughout the chapter. I can assure you that I do not intend to raise those general issues that apply to the whole chapter again, Mr. Cook. In challenging clause 24, I am effectively seeking to allow the clause to stand for the whole chapter. 
I particularly want to focus on the fact that, as the Paymaster General acknowledged, almost all US investment in the UK—and much UK investment overseas—is funded through some kind of hybrid entity. I am told that hundreds of billions of pounds of UK inward investment is held in that type of entity. The Paymaster General has made it very clear that it is not the Government's intention to hit all that inward investment. That gives rise to the question: how have the Government calculated the figure of £200 million? What computation have they done? Is it simply an arithmetical addition of the amounts that are estimated to be avoided under the disclosed schemes of which the Government received notice under the Finance Act 2004, or have they entered into some more complex calculation? 
We have come back several times to the question of how a UK tax advantage is to be calculated, and one of our main concerns is that condition C in clause 24 is a subjective test. The condition 
''is that the main purpose, or one of the main purposes''
is the creation of ''a UK tax advantage''. I have already made the point that that is a very difficult test for companies to deal with, because tax will always be a relevant and important consideration in deciding on any investment opportunity, and therefore in looking at the structure that will be used for that investment. 
I note in that context that, in the draft guidance, paragraph 27 says, in essence, that the company will be okay if ''the sole purpose'' of a scheme is 
''to obtain an overseas tax advantage''.
Will the Paymaster General explain the asymmetry? Why is it not okay if the main advantage is the obtaining of an overseas tax advantage? The provision, as drafted, seems too harsh. She will know that, in the case of US investors and the so-called  check-the-box approach that they will adopt, the obtaining of an overseas tax advantage will be the primary consideration in many of these transactions and the structurings that are used for them. 
We spoke about the damage that the legislation could inflict on US entities because hybrids are used in straightforward debt funding of foreign investment by many US companies to take advantage of incentives that are deliberately inserted in the US tax code. According to people in the US, companies in other jurisdictions are able to access those incentives without the use of hybrids. However, because of the way the US tax code works, it is essential for those US investors, if they are to be competitive, to have access to the use of hybrids. That is essential for their ability to make continued substantial investment in the UK. 
This proposal has caused bewilderment and concern among US investors. I shall quote from one or two sources. The National Foreign Trade Council in the United States wrote to the United States Treasury Secretary and said: 
''The NFTC is writing to you, as a matter of urgency, to express our members' concern about proposed legislation in the United Kingdom . . . Many of our members invest in the UK, owning many hundreds of billions of dollars of assets and employing tens of thousands of employees . . . our members believe that the legislation as currently drafted might, if read broadly, affect longstanding straightforward debt-financing into the UK. Our members are already subject to agreements with the UK tax authorities on the allowable amount of debt.''
That refers to the transfer pricing and thin capitalisation rules that we discussed earlier. The letter continued: 
''Any further reductions of debt below these agreed limits - which this legislation could bring about - will result, effectively, in increased UK tax.''
It goes on to explain why hybrid entities are necessary for US investors to put them on a level playing field with other international investors. It concludes: 
''This measure will adversely affect the position of US investors in the UK. Our members tell us that this legislation may affect future investment in the UK by US corporations. They also tell us that it may affect current investment, with a potential effect on UK employment.''
What discussions have the Treasury had with the United States Treasury in drafting and then redrafting this legislation? My hon. Friend the Member for Braintree (Mr. Newmark) referred to the relatively recently negotiated tax treaty between the US and the UK. In her reply, the Paymaster General was clear in saying that this proposal was totally compliant with it and did not raise any problems in relation to it. 
Patricia Brown, the acting US Treasury international tax counsel, speaking at an American Bar Association meeting in May, took a slightly different view. Beyond concerns over the broad base of these new UK rules, there was a separate issue involving the etiquette of the Inland Revenue's approach to addressing the problem. She said: 
''A unilateral approach like this is a little inconsistent.''
That referred to the dialogue between the UK and the US, which is outlined in the notes to the bilateral tax treaty. There is an issue about how much transatlantic  consultation and co-operation there has been on these matters. 
I understand that the check-the-box entities that US multinationals regularly use in these financing arrangements are—the Paymaster General will tell me if this is not the case—necessarily defined as hybrid entities under this legislation. It is essential for US companies to use such entities to permit interest on borrowings incurred to finance non-US activities to be deductable against US consolidated taxable income, while leaving the UK tax base wholly unaffected, compared with the situation without the check-the-box structure. 
I hope that the Paymaster General can confirm for the record that the use of a plain vanilla financing structure for debt, but using check-the-box, will not in any circumstances give rise to a company being subject to a notice under these procedures. It is clearly important to US investors that the opportunity to offset tax in the United States is not lost to them, and what happens in the US should not be a huge concern to the UK tax authorities. 
I have an example for the Paymaster General that goes to the essential question that we have identified so far in this debate of how one identifies a UK tax advantage and whether that definition, which appears so simple, could have the unintended consequence of catching US hybrid entities that the Government do not intend to capture. For example, if an American decided to build a factory and create jobs in the UK, he could get bank finance for that transaction that would attract tax relief in relation to the interest paid to the bank. However, he may find that the numbers do not add up and meet his threshold return and he cannot go ahead with that investment in the UK—building a factory and creating jobs. So, he sharpens his pencil, goes back to work and finds that by financing the investment by lending from his US parent company and using US tax planning, he is able to get what amounts to a subsidy from the American taxpayer for his investment in the UK. UK tax relief would be completely unchanged—it does not alter the UK position at all—and the only difference would be that the American taxpayer would be helping to finance the investment in the UK and creating British jobs. 
The new legislation and Her Majesty's Revenue and Customs guidance says that, in such a case, the UK tax relief would be denied, because without the subsidy from the US taxpayer—without the use of the hybrid entity—the investment would not be viable: a straightforward bank loan would not have worked and the investment would not have gone ahead. Such a company in the UK would receive a notice from the Revenue and would need to compute what its deduction would have been in the absence of the hybrid structure. If it were honest about the audit trail of that transaction, it would have to disclose that it considered using plain bank debt and that the numbers did not stack up, so the investment would not have gone ahead and there would have been no loan interest to deduct. In those circumstances, it seems that the whole deduction must be disallowed as attributable to  the existence of the qualifying scheme—the hybrid structure. 
That is the nub of the problem. We are beginning to find a way through the broad sweep of things. However, there is still a serious, niggling concern that in defining the UK tax advantage, a company will be left with no other conclusion than that the whole deduction is disallowable if the honest answer to the question of what would have been its alternative structure is that there would have been no alternative structure. I would be grateful if the Paymaster General could clarify that point, and, perhaps, offer reassurance to US investors who might be concerned about that issue. We all wish to minimise uncertainty in the system, or eliminate it if that is possible. 
The Paymaster General stated that the UK was not trying to act as the world's policeman, but she went on to say that we cannot build our competitiveness on tax advantage. 
Dawn Primarolo indicated dissent.

Philip Hammond: I heard the right hon. Lady say tax advantage, but it does not actually matter whether she said that or tax avoidance. The point is that she can make a moral case if she wishes, but we have to face practical issues in the real world, such as that different jurisdictions offer different incentives to investors, and we simply cannot afford to make the UK a less attractive jurisdiction because of some high-minded objection to certain practice.
The US looked into changing its tax legislation with regard to the use of hybrids, and it rejected going down that route for sound business and economic reasons. I also understand that the Netherlands moved in that direction, but that it is now moving back in the other direction because it saw the damage that it was doing to its economy. 
There has been a lack of consultation on this measure. I understand the Paymaster General's point about the Inland Revenue usually being wary about consulting on avoidance matters, but I ask her to think again about that position in light of the regime that we now have. We have a disclosure regime, so the avoidance schemes we are addressing were disclosed under the Finance Act 2004. Therefore, it is not as if she has to be alarmed about the information getting out. There is no secrecy; the people who do the tax planning, those who sell these schemes, and the people in the big four firms that are key to this are all aware of the schemes in question. The Paymaster General is not prepared to reveal them to the Committee—perhaps out of respect for the marketing structures of the firms in question—but there is no doubt that the people who need to know about these things will know about them. 
The Inland Revenue also has a well established press release system, which sets down a marker for the date that legislation will come into effect. With those two defence mechanisms in place, I suggest that it would be perfectly possible to consult widely on measures after a press notice has been issued, safe in the knowledge that most of the people who will be  interested will already know about the schemes in question in any case. 
Let us consider this Bill. In its original form in March this year, it would have been little short of a disaster. It has been significantly redrafted, and, by universal agreement, significantly improved. However, that happened because of a piece of luck. Because of the election, consideration of the legislation was delayed, and that allowed the Government to go back to the drawing board and the specialists in this field to make their case to the Treasury. 
I recently met a company that believes that, under the Bill as originally drafted, it alone would have had to pay more than the entire £200 million that the Government say they are seeking to raise under this chapter. Fortunately, because of the redrafting, that company no longer faces that challenge. The Government's original disclosure rules were substantially rewritten when they sat down with experts from the private sector and explained to them what they sought to achieve. The Government worked with those experts to develop an effective regime. We now have a regime that works; the Paymaster General has referred to it throughout our debate today. 
I shall ask the Paymaster General a couple of final questions. I think that I have already asked her my first, but I should like to be sure.

Christopher Huhne: Ask it again.

Philip Hammond: I have not had an answer, but, to be fair to the Paymaster General, she has not had an opportunity to give one. Will she confirm that when double relief is claimed, the legislation will look across time and not just at a single period? In that way, it will not inadvertently catch taxpayers simply because the matching receipt has been taken into account in a different period from that of one or other of the reliefs.
I should like the Paymaster General to confirm something else, so that I understand it in case the sun has been getting to me. Paragraph 24 of the guidance note mentions a loan being used 
''to convert debt to equity''. 
Will she confirm that that is meant to say ''to convert equity to debt''? If it does not, perhaps I have misunderstood what the guidance note is trying to say. 
We are trying to get at the cumulative impact of this legislation on US investor sentiment. Poor drafting, repeated changes and lack of clarity of purpose mean that there is residual uncertainty about the extent to which the recognised investment structures used by US firms for many years and encouraged by the US check-the-box tax regime will be caught. On top of that, there is the somewhat arbitrary regime for the imposition of the notices.

Brooks Newmark: My primary concern above and beyond the excellent points the Paymaster General has made on this matter and on its anti-avoidance nature, is about a double whammy. The financial services sector of UK plc has an enormous competitive advantage, but there is still a high risk of damage to employment in that sector because of the lack of  inward investment and the current wording of the legislation. There are also the issues about the manufacturing sector raised perfectly legitimately this morning by the hon. Member for Bishop Auckland (Helen Goodman).
We want to encourage businesses that do not necessarily have a negative impact on UK plc to come to this country. Jobs in the manufacturing sector still need to be created in this country. Would you not agree—

Frank Cook: Order. No questions are to be put directly to Committee members. I say yet again that they should be put through the Chair.

Brooks Newmark: I apologise, Mr. Cook; I am new. Would my hon. Friend not agree that we still risk the double whammy of damage to employment in the financial services sector and damage to employment in our manufacturing sector as a knock-on effect or unintended consequence of the provision?

Philip Hammond: My hon. Friend is exactly right. Whatever Government Committee members might think, we do not make such points for the good of our health. Although the Paymaster General may think that she has dealt with all the issues raised and although her officials may tell her that those concerns and fears have been dealt with, the message that we are still getting from the outside world—from specialist advisers and from industry—is that there are still real concerns about this legislation.
Beyond that, there is still a perception in the US that the UK has now taken a distinctive turn. It has moved in a direction that international investors find uncomfortable and, as I have said, there is a cumulative impact on the international—particularly the US—perception of the investment climate in the UK. I share my hon. Friend's concern that the Government need to think hard about such matters. 
We know that there is a need for revenue and that the Government have targeted a certain amount to be raised by such measures. However, have they carried out a real analysis of what the reaction of the corporate sector of the international investment sector will be? Surely the Government do not think that everything will remain the same and that the only thing that will happen is that UK corporate tax receipts will increase by £200 million and all corporations will act precisely as they have done in the past. That is not the real world. 
In practice, international investors will adjust their models to deal with the position that they fear in the UK. Multinational corporations may look again at where they locate their European headquarter operations or at the base from which they undertake their outward investment. Over time, there will be an adjustment in the behaviour of the sector that takes full account of what the Government are doing. That is the nature of an internationally competitive business environment and, whether the Paymaster General likes it or not, part of that internationally competitive business environment is the tax environment. She might prefer all businesses and investors to consider pre-tax returns as the basis of their investment, but  they do not—and they will not in the future. There will be a second-order consequence. 
Perhaps it will not matter to the Paymaster General or her boss, but experts in the field genuinely believe that the end result of such a decision three , four or five years down the line will be that any revenue gain to the UK Exchequer in the short term will be offset by the negative effect on UK growth from the declining attractiveness of the UK as an investment destination. I still believe that the best solution would be for the Government to withdraw chapter 4, go out to consultation, think again about it, make sure that it is redrafted to reflect only those narrow purposes that the Government say that they have in mind and reintroduce it at a later stage. 
I seek your guidance, Mr. Cook. Would it terminate the debate if I sought to ask leave to withdraw amendment No. 58, and give the Paymaster General no opportunity to reply?

Frank Cook: There are still hon. Members seeking to engage in debate.

Philip Hammond: Then I end there.

Rob Marris: A stand part debate on the clause seems to have been rolled together with the amendments. The hon. Member for Braintree talked about living in the real world. Conservative Members sometimes have difficulty with that, so let me spell it out. Even in his terms, lots of Labour Members live in the real world. I started out as a teenager helping to run a family business. Years later, I ended up as a partner in a partnership with a turnover of tens of millions of pounds. I appreciate that that had nothing to do with international high financing, but that was the real world.
The hon. Gentleman prayed in aid his old professor, J. K. Galbraith. Well, he will probably know better than me that J. K. Galbraith was born in about 1910 and attended the Ontario Agricultural college in Guelph where he started training as an agricultural economist. Some of the problems that he grappled with at that stage in his career were precisely the sort of things dealt with by this chapter. Canada—the land of his birth, where he was educated initially—was then, as it is now, a branch plant economy in terms its domination by the United States of America. 
Canada introduced the first anti-monopolies legislation in the world in the 1890s, because of the activities of multinational corporations, which were border hopping and trying to play off one tax regime and one jurisdiction against another. Those are precisely the things that J. K. Galbraith would have grappled with as an economist in his career. 
I have not had the pleasure of meeting J. K Galbraith, although the hon. Gentleman has, but I suspect that J. K. Galbraith—based on his views and experience—would be with the Government on the broad thrust of this chapter entitled ''Avoidance Involving Tax Arbitrage'', followed by clause 24, and so on. The title of the chapter is important—it refers to the thrust of the mischief that this Government, through this Bill, are seeking to address.

Philip Hammond: On a point of order, Mr. Cook, would I be right in thinking that, far from what the hon. Gentleman says, the title does not form part of the Bill?

Frank Cook: Not for the purpose of being part of the Bill, but I am interested in how the hon. Member for Wolverhampton, South-West (Rob Marris) develops his thesis. I am still waiting to discover the pertinence that I am looking for.

Rob Marris: If you will extend me a little more latitude—

Frank Cook: Order. I already have.

Rob Marris: Well, Mr. Cook, I prefaced my remarks by saying that I was addressing the stand part debate, because you have, in your wisdom, rolled it into the debate on the amendments. I appreciate that my remarks do not refer directly to amendments Nos. 58 and 59.
I stress the word ''avoidance''. Explanatory note number 2 on clause 24 says: 
''The legislation will apply from 16 March 2005, to companies that use schemes involving certain types of hybrid entities or instruments, for UK tax avoidance purposes, but only if HM Revenue and Customs issue a notice to that company, directing that the legislation applies.''
I stress the words ''certain types''. The legislation will not apply to all hybrid entities or all instruments, only certain types, and only where HMRC issues a notice. We are dealing with large multinationals with access to all kinds of tax advice, rich lawyers and accountants, and so on; if they do not agree the notice they can go through the appellate procedure, which we discussed earlier, and apply to set it aside. They can afford it. 
The hon. Member for Runnymede and Weybridge talks about the United Kingdom not being the world tax cop, and in one sense he is right. However, we have to take cognisance of the fact that the United States of America, to which he referred quite a lot in his most recent speech, has had unusual tax regimes going back many years. He may remember what we called the international sales corporations in the 1960s, which in the late 1960s President Nixon turned into the domestic international sales corporations—conveniently acronymed as DISCs—and he may remember the tax breaks that they got to enable them to compete unfairly around the world. What we are talking about—and what clause 24 and the subsequent clauses are designed to address—is competition between double-dipping multinationals versus domestic companies and single-dipping multinationals. 
The hon. Gentleman was just giving an example of an American company owner coming here, sharpening his pencil, and so on. I will not repeat all that. However, his little homily failed to consider that if the American company thinking of investing in the United Kingdom gets an unfair tax advantage, that is to the disadvantage of a UK-based company that would be seeking to borrow money here at a higher rate.

Brooks Newmark: I believe that the hon. Gentleman misunderstands the concept of return on capital in a tax-neutral environment. My hon. Friend the Member for Runnymede and Weybridge gave a tax-neutral  example, but one in which there would be a negative, devastating effect on the company's economic decision as to whether to invest in this country. That is where the confusion arises in the hon. Gentleman's example.

Rob Marris: That is not at all how I understand the example given by the hon. Member for Runnymede and Weybridge. He talked about a company from the States that wished to set up in the United Kingdom and could not afford to do so if it borrowed money, but could if it got a tax dodge and borrowed money from the USA. In those circumstances a United Kingdom-based company would be disadvantaged, as would be a multinational that was only single dipping.

Philip Hammond: What UK-based company? This morning, the hon. Member for Bishop Auckland gave an example of inward investment in her constituency by a European multinational corporation, Electrolux. Does the hon. Gentleman imagine that there is a UK manufacturer of domestic devices desperately disappointed this week because he could not hire that work force and buy that factory in Bishop Auckland? Of course not. That is a net gain to UK plc.

Rob Marris: It is not necessarily a net gain if a UK company that wished to invest found that it could not do so because it was being forced to compete unfairly; it is as simple as that to me. The issue is not just about minimising uncertainty, about which the opposition have banged on a lot; it is about a level playing field. It is not a question of the Government seeking to raise £200 million, or whatever is the sum, for tax revenues. As I understand the figures, that figure relates to what they think the side-effect of the measures will be if they are brought in. These are indeed policing measures. They are designed to ensure a level playing field to prevent tax avoidance, and I support them.

Dawn Primarolo: I shall answer the questions raised and will not be tempted to engage in the wider discussion that the hon. Member for Runnymede and Weybridge began. However, I must say to the Committee that if the hon. Gentleman cannot see that avoidance is not good for an economy, I really cannot help him.
The basic principle that we are observing is that the counteraction of UK tax avoidance is a matter for our law and not for other countries'. That is precisely why we have Finance Bills and why we defend our taxation rights. When the hon. Gentleman reads his remarks, he may feel that, in the implications of what he said, he drifted rather far from his party's current policy with regard to the supremacy of the UK in making its tax laws. 
I shall deal briefly and succinctly with the hon. Gentleman's questions. First, yes of course the UK has ongoing discussions with the US, but a matter of UK law is a matter of UK law; it is not a matter for negotiation with anybody. I remind him that the US introduced similar reverse hybrid rules in 2002 without any discussion with the UK—and, of course, was absolutely correct to do so. It is for each country to address the avoidance in its own tax regime. 
The hon. Gentleman mentioned check-in-the-box and double deduction. Where there is a double deduction and one of those deductions is in the UK, if that deduction is part of a contrived avoidance scheme and is aimed at achieving a UK tax advantage, it is right to deny that UK deduction. As I explained, the UK is not acting as a global policeman. In fact, the hon. Gentleman was almost suggesting that we should announce how we might act and then consult widely, particularly with the US, before doing so, as though there should be some co-operation. As I have repeatedly said, it is not our intention to act as a global policeman. It would be inappropriate for us to consider the treatment of the deduction in another state—in the US or anywhere else. If we were to do so, we would be acting as a policeman for the world. 
The hon. Gentleman quoted from a letter and referred to a lecture or an address, too. The letter was based on a misunderstanding of the provisions of the first Finance Bill. If the election had not intervened, we would be discussing that Bill now; there would have been as much time to consider and amend that Bill as there is to discuss the current one. In the Finance Bill we are now discussing—as opposed to the one that was withdrawn and then reproduced in two halves, one before the election and the other after it—the Government added a disclaimer to make it clear that only UK tax advantage deductions are denied. Since that happened, all the concerns expressed in the quotes that the hon. Gentleman read out and elsewhere appear to have gone away, because no further suggestions have been made to HMRC. 
Many companies invest in the UK via what are called check-the-box structures, and, as I said this morning, not all those structures will be caught. That is because we are not aiming at all those structures. The legislation is not an attack on arbitrage; it is a response to contrived structures designed to obtain a UK tax advantage, as revealed by disclosure.

Philip Hammond: Will the right hon. Lady give way?

Dawn Primarolo: I am going to respond to the hon. Gentleman's points. He spoke for a long time and put a lot of questions on the record, and it would be good if I were to provide answers to them now.
The hon. Gentleman raised the question of double relief. Rule A addresses a deduction that has been, or may be, deducted. It will prevent the double dips that sit in different time periods, which is what it is designed to achieve. The hon. Gentleman also asked about commercial purpose. The application of the legislation does not depend on whether there is a commercial purpose. It depends on whether there is a main purpose of achieving a UK tax advantage. 
I congratulate the hon. Gentleman on a good spot with regard to an earlier draft of the guidance note; as he suggested, it should have referred to equity to debt rather than debt to equity. That has already been changed. That is the beauty of having guidance notes in consultation, which they still are—discussions are still taking place with business. 
There is no possibility of the arbitrage legislation applying in such a way as to introduce a double  charge. Its effect is limited to cancelling tax avoidance. On that basis, the fears that the hon. Gentleman described are unfounded, and if he wishes to press the amendment to a Division, I will ask Labour Committee members to oppose it. 
Mr. Philip Hammond rose—

Frank Cook: Before you start, Mr. Hammond, do you still intend to seek the Committee's leave to withdraw the amendment?

Philip Hammond: I shall be in a moment, Mr. Cook. However, I wish to respond to the Paymaster General's remarks first.
I am grateful to the right hon. Lady for her comments. However, I do not think she answered my key question: can we be assured that there is no danger of a company finding itself within the scope of the legislation because the comparator by which it has to measure its UK tax advantage is the outcome of no deal being done, and therefore 100 per cent. of the UK deduction is deemed inadmissible because the company must conclude that in the absence of the hybrid structure it would not have been able to finance the investment at an acceptable rate of return using ordinary bank debt? That is the nub of the debate. If the Paymaster General does not want to deal with that question now, it could appropriately be returned to in relation to clause 25. 
The right hon. Lady talked about avoidance through the double dip and adopted a high moral tone. She said that the issue is one of UK tax loss. Based on that argument, where a double dip occurs, if the other jurisdiction changes its legislation so that no deduction arises in that jurisdiction, her objection is totally removed, even though there would be no change to UK revenues because the UK deduction would remain. It would no longer be challengeable because there would be no US or other jurisdiction deduction. There would be no change to the UK revenue, yet the Paymaster General's argument collapses. If ever there was a definition of acting as a world policeman, rather than as acting simply as the policeman for the UK Exchequer, that fulfils it. 
 Perhaps I did not make an earlier question clear. The Paymaster General addressed specifically a question that I asked when I was talking about double deduction. However, she has not answered the important question about what happens when a double deduction takes place but there is also a double counting of the income. In other words, there is a deduction in the UK for the interest paid by the UK subsidiary company and a deduction in the US for the interest that has been paid. That is because there has been a full consolidation with the US parent company through a check-the-box type structure and the income of the UK subsidiary has also been taken into account in the total tax calculation of the US parent company. In those cases where there is income that offsets that second deduction, can the Paymaster General confirm that that would not be treated as a double dip? That seems like common sense, but the answer is not obvious to me from the Bill or from what has been said today. I do not know whether the Paymaster General  can to clarify that point now, but I will be grateful if she does.

Dawn Primarolo: I have answered the hon. Gentleman's question, but he does not seem to appreciate what the answer is. Perhaps he would like to reflect on the matter when he reads Hansard. If he is still not happy, I am sure that there will be mechanisms that will allow him to return to the matter. I have specifically addressed his point and have done so clearly and succinctly.

Philip Hammond: It is interesting that the Paymaster General has just spent 45 seconds confirming that she has addressed my point, but chose not to tell us whether the answer was a yes or a no. I will have a look at the record.

Dawn Primarolo: This is pathetic.

Philip Hammond: The Paymaster General says this is pathetic. If she wants to degenerate into those kinds of remarks, so be it. I have studied the right hon. Lady's technique and I am not surprised that she is standing up and telling me that she has already answered my question and that the problem is that I am too dumb to have understood the answer. If that is the way she wants to conduct the debate, that is fine by me. I will read Hansard, as she requested.

Dawn Primarolo: This afternoon, just about every comment that the hon. Gentleman has made has been laced with barbs. I have ignored them because we are here to discuss the Finance Bill on the basis of the points raised and to try to answer them. I am trying to save time by not repeating what I have already said. I assure him that I have answered all his questions and I hope that we can therefore proceed with the other points that he wants to make.

Philip Hammond: I hear what the Paymaster General says. If I am too stupid to have understood the answer, a simple yes or no would have been helpful. We will leave it for now. I will look at the record in due course and am sure that I will be greatly enlightened.
I shall urge my hon. Friends to vote against clause 24 stand part, but I beg leave to withdraw amendment No. 58. 
Amendment, by leave, withdrawn. 
Question put, That the clause stand part of the Bill:—
The Committee divided: Ayes 12, Noes 7.

Question put and agreed to. 
Clause 24 ordered to stand part of the Bill.

Schedule 3 - Qualifying Scheme

Philip Hammond: I beg to move amendment No. 46, in schedule 3, page 69, line 18, at end insert
'in so far as it applies to profits or gains not of a capital nature'.

Frank Cook: With this it will be convenient to discuss amendment No. 47, in schedule 3, page 69, line 19, after third 'tax', insert
'in so far as it applies to profits or gains not of a capital nature'.

Philip Hammond: The amendments would clarify the definition of schemes involving hybrid entities. Schedule 3 deals with the definition of qualifying schemes. The words in the amendments would be inserted after the reference to corporation tax. The purpose of the definition of a hybrid is to define entities that are characterised by different treatment in different jurisdictions. Because of the widely differing treatment of capital gains or corporations in different jurisdictions, the amendments aim merely to achieve standardisation by defining relevant taxes more tightly for the purposes of the legislation—to include corporation tax only in so far as it applies other than to capital gains.

Dawn Primarolo: Schedule 3 lists the deductions rules for arbitrage, which apply where there is a qualifying scheme. They do not cover all possible instances of arbitrage, but instead concentrate on certain instances of the scheme that are likely to give rise to the greatest risk. The schedule defines a qualifying scheme as one that contains either a hybrid entity or has a hybrid effect. A hybrid entity is recognised for tax purposes as a person in its own right, but for some reason is also recognised as part of a separate person under a different tax code, be that a UK tax code or a foreign one. Any scheme including such an entity will be a qualifying scheme for the purposes of the arbitrage rule.
Amendments Nos. 46 and 47 would amend the definition of hybrid entity so that the profits of a capital nature are excluded. Those changes would create a considerable risk that items classified as capital under one system but not under another will no longer be caught by the legislation. That deliberate exploitation of the differences in classification in order to gain a UK tax advantage is precisely the sort of thing that gives rise to the mischief that the Government are trying to counter, so we cannot accept the amendments. For the reasons that I have given, if the hon. Gentleman wants to press the amendments to a vote, I will ask my hon. Friends to oppose them.

Philip Hammond: I am a little puzzled by the Paymaster General's brief reply. I assure her that the amendments were not designed as wrecking amendments, which is more or less the inference I draw from her comments. Rather than to cut through the heart of the Bill, they were intended to ensure comparable treatment in different jurisdictions because of the strange ways in which capital gains are treated in corporate tax regimes in different jurisdictions. 
I confess to the Committee that the amendments are not the product of my original thought. Others who have expressed concerns will undoubtedly read what the Paymaster General has said and consider her views. If there are issues that need to be further explored, I am sure that we will have an opportunity on a later occasion. I beg to ask leave to withdraw the amendment. 
Amendment, by leave, withdrawn.

Philip Hammond: I beg to move amendment No. 48, in schedule 3, page 69, line 25, at end insert
'and the instrument, shares, securities or debt instrument involved is not of a class of instrument, share, security or debt instrument which is traded upon a recognised stock exchange or upon a recognised investment exchange within the meaning of section 841 of ICTA,'. 
Paragraph 4 of schedule 3 deals with schemes that achieve the hybrid effect by the use of convertible debt instruments. The purpose of including such instruments in the rules is that although they are an equity-type investment in terms of their risk and return, the coupon is deductible interest and not dividend from the UK company's tax perspective. The amendment, which I stress is probing, would provide an exclusion for publicly listed instruments. 
I am assured that similar provisions exist in relation to UK group relief rules so that quoted instruments—listed instruments—cannot be treated as quasi-equity by the Revenue for the purpose of arguing a dilution of percentage shareholdings and thus denying group relief to a taxpayer. Our aim is to narrow the scope and limit the legislation to clearly contrived schemes, which I suggest would not use listed instruments. The amendment uses the definition of recognised stock exchange in the section 841 of the Income and Corporation Taxes Act 1988. 
I accept that the amendment may be slightly widely drawn, in that it refers to any instrument that is listed on a recognised stock exchange, and I accept that there may be an argument that some such instruments could be used in such a scheme. However, will the Paymaster General address the substance of the argument? Would the fact that an instrument is listed—she might like to tighten the wording to ''actively traded''—be a reason for not applying the definition in paragraph 4, rather than simply a material consideration in determining an individual case? I realise that the question of whether or not the instrument is traded will be a material consideration in determining the case, but I hope that she can say that in certain circumstances it will be apparent in advance, where an instrument is listed or perhaps traded, that it does not come under the legislation. That would give us more certainty and clarity.

Dawn Primarolo: I shall respond to the hon. Gentleman's probing amendment and try to give him the reassurance he seeks. First, I shall explain why the Government will not accept amendment No. 48. The amendment would change the part of schedule 3 that deals with schemes having a hybrid effect. Schemes will have a hybrid effect for the purpose of the arbitrage rules if they include a hybrid instrument or a defined type of share interest. Schedule 3 is, in effect, a list of those instruments. The amendment would exclude from the range of instruments identified,  those of a type that are traded on a recognised exchange. The Government cannot accept the restriction of the definition for two reasons. First, the list of instruments having a hybrid effect covers the kind of instruments that have been shown to lend themselves to use in schemes designed to avoid UK tax. Many of those instruments are traded on a recognised stock exchange, but that does not mean that they cannot be used for tax avoidance. The automatic exclusion of a traded instrument, as proposed by the amendment, would simply mean that avoidance could continue through the simple expedient of listing instruments on any recognised stock exchange. That is probably not what the hon. Gentleman wants to happen.
The Government's second concern is that the wording of the amendment does not even require the instrument to be traded itself—it refers simply to a class of such instruments. The effect of the amendment would be to remove most hybrid instruments from the scope of the provisions, even though they form part of a scheme that is designed to give rise to a UK tax advantage. Consequently, that could be rather expensive, as I am sure the hon. Gentleman will accept. 
I assure the hon. Gentleman that the genuine placement of an instrument into the market will not normally be caught by the arbitrage deduction rules, as the instrument is unlikely to be part of a scheme that had a main purpose of obtaining a UK tax advantage. Further details on the issue can be found in the guidance issued by HMRC. I appreciate from earlier comments by the hon. Gentleman about an error in the guidance that he will want to check that—it is draft guidance that is still under discussion. 
For the reasons that I have set out, I hope that the hon. Gentleman will understand why the Government will not accept the amendment and go down that route—he said that it is a probing amendment so he will no doubt not push for a vote. I hope that he accepts my reassurance that the provision is not a blanket approach but is fairly specific to avoidance within the arbitrage regime.

Philip Hammond: I accept what the Minister says. It may not have been my thought when I originally tabled the amendment, but I hoped that the amendment would give her the opportunity to say something about traded instruments in general. She has done that, which I am grateful for, so I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn. 
Question proposed, That this schedule be the Third schedule to the Bill.

Philip Hammond: I have a question to put to the Minister on paragraph 3. For clause 24 to bite, four conditions have to be met, including condition A, which is that the scheme is a qualifying scheme as defined in schedule 3. The schedule is then broken down into different parts dealing with hybrid entities, schemes involving hybrid effect and schemes involving hybrid effect through connected persons.
''under the tax law of any territory, the entity is regarded as being a person''.
It has been suggested to me that that is clearly intended to mean ''under the tax law of any relevant or pertinent territory''—that is, a territory in which the entity is taxed because it is resident there or a territory that taxes the members of the entity because they reside there. 
Given how the paragraph is drafted, it is arguable that regard should be had to the tax law of every territory in the world to ascertain whether an entity is regarded as a person. Clearly, that would be an almost impossible test to fulfil and would introduce huge uncertainty. Taxpayers would have to keep an eye on the changing tax laws of remote territories and emerging countries that have legislation that is not widely scrutinised in this country. It has been suggested to me that if that were the correct interpretation, every entity would be a hybrid entity, including all UK companies, as it would not be possible to conclude confidently that either A or B were not satisfied where it is known that B or A is satisfied. 
I hope that the Minister can confirm—I am sure that she can—that the paragraph is intended to mean ''under the tax law of any pertinent or relevant territory'', which in this case would mean territory in which the entity is resident or in which any of the partners in the entity are resident and are taxed. We have not tabled any amendments to this effect, but will she consider whether clarification is needed to make it clear that the paragraph does not mean any territory whatever, anywhere in the world?

Dawn Primarolo: My answer to the hon. Gentleman's first concern is yes, it means any relevant territory. On his second point—that I should reflect on whether that needs to be spelt out in greater detail—I should say that it has not been raised with us as a problem of interpretation. It seems clear from the presentations, the open day and the submissions received by the Department, that the paragraph is understood to mean ''relevant'' territory.
If for any reason there is confusion outside the House or clarification is sought as a result of scrutiny of today's Hansard, I will be happy to consider the hon. Gentleman's suggestion. However, I am not minded to commit myself to doing something when there does not appear to be a problem. However, I shall reflect on his point in case the issue is raised. 
Question put and agreed to. 
Schedule 3 agreed to.

Clause 25 - Rules relating to deductions

Philip Hammond: I beg to move amendment No. 32, in clause 25, page 22, line 3, leave out 'no amount is' and insert 'an amount'.

Frank Cook: With this we may discuss the following: Amendment No. 33, in clause 25, page 22, line 4, after 'Acts', insert 'is reduced'.
Government amendments Nos. 70 and 71. 
Amendment No. 34, in clause 25, page 22, line 10, at end insert— 
'and to the extent that the entitlement to such deduction or allowance had arisen as a result of a scheme the main purpose of which is to achieve a UK tax advantage.'. 
Amendment No. 35, in clause 25, page 22, line 11, leave out subsections (4) and (5). 
Government amendments Nos. 72 to 74.

Philip Hammond: I shall address the amendments in two sub-groups and then make passing comments on the Government's amendments, which the Minister will no doubt explain in greater detail.
On amendments Nos. 32, 33, 34 and 35, as the Bill is drafted, the taxpayer has two options on receipt of a notice. Either he can disclaim part or all of the deduction that he is claiming, or he can apply the rules in clause 25 to his self-assessment, which would mean the disallowance of the whole of the interest deduction to the extent that a deduction had been made. We are arguing that the taxpayer who chooses not to disclaim should not be penalised, but should be required to make a proportionate reduction of the claimed allowance or deduction as he would if he disclaimed, so that he is placed in the same position as he would have been had he disclaimed part or all of the allowance. 
We suggest that equity requires that the amount disallowed under subsection (3) should be the amount attributable purely to the UK tax advantage delivered as a result of the qualifying scheme and nothing more. I hope that the Minister accepts that principle. No doubt she will have something to say about the amendment itself, but if she can accept the principle, and explain, if she does not think that the amendment is necessary, why not, that would be helpful. 
Amendment No. 35 seeks to omit subsections (4) and (5), because they raise the possibility of an amount being treated as deducted or otherwise allowed, where it is not actually so allowed, as a result of the operation of a rule similar to that used in an overseas jurisdiction. That could give rise to a double hit on the taxpayer if he is deemed to be operating a double deduction and the amount in question in the overseas jurisdiction is not allowed to be deducted. I can see no reason why, if the deduction in an overseas jurisdiction is not allowed, the requirements for falling within the scope of this legislation should not be deemed to have failed. Again, an equitable interpretation would be that if the taxpayer, for any reason, does not get the double deduction, he should not be penalised. If I have missed something here, no doubt the Minister will tell me in due course. 
Government amendments Nos. 70 to 72 look, on the face of it, to be harmless tidying-up exercises. We are slightly more interested in Government amendment No. 73, which seems to make a substantive change. It turns the subsection in question from providing a limiting definition of  reduction of liability to adding circumstances of liability. That is a rather big turnaround in what it is intended to do. I shall wait to hear what the Minister says about the Government amendments and then question her further on them.

Dawn Primarolo: Clause 25 sets out how the legislation restricts the amount of deductions allowable for corporation tax purposes with deduction rules, where all the conditions in clause 24 are met. The clause contains two rules that can reduce or deny deductions. The first of those—rule A—applies if two deductions are available for the same expense, and limits the amount of the deduction for corporation tax to an amount that is not allowed or deducted elsewhere. Rule A also applies where there would be double deduction but for the fact that another country has similar legislation. As drafted, the rule makes no identification as to the person to whom the deduction rules arise. However, the context of rule A could be construed as requiring that both the deductions must arise in the same country. That is clearly not how rule A should operate and it is not in keeping with the published guidance.
Government amendments Nos. 71 and 72 put the matter beyond doubt by making it clear that the additional deductions can arise for another person. Rule A also refers to the same expense, although it does not directly link that reference to the deduction that is the subject of the rule. 
Parliamentary counsel advised on the tabling of amendment No. 70. The advice was provided to the Government on the basis that there was an ambiguity which needed to be removed. As drafted, amendment No. 70 does that. 
The second rule—rule B—applies when a payment gives rise to a tax deduction but the matching receipt is not taxable and the receipt is normally taxable on its income or gains. However, where rule B applies, it will reduce the amount of the UK tax deduction to the extent that the recipient is not taxable. Rule B will not apply, however, where the recipient is exempt from tax due to a statutory exemption—for example, charities and pension funds. 
The draft guidance issued by HMRC on 16 March 2005 made it clear that rule B also applies where the recipient has reduced their liability by using tax credits or other deductions that may arise under the scheme. The clause as drafted covers that, but it also includes a paragraph that clarifies how the clause will operate in the case of deductions. I give credit to the Law Society, which was very helpful in pointing out to the Government that the explanatory paragraph could be read as restricting the intended operation of the clause. Amendments Nos. 73 and 74 therefore ensure that the clause continues to operate as intended and in accordance with the guidance already issued. I hope the Committee accepts that the Bill has benefited from our discussions and that the Government amendments improve it. I commend them to the Committee. 
The Opposition amendments would alter rule A, which, as I explained, denies the deduction to the extent that it is available under another tax code, often referred to as double dips because two deductions are  obtained for just one expense. It appears that amendments Nos. 32 to 34 are intended to limit the effect of rule A in two ways. First, to restrict the extent to which the rule cancels deductions to no more than is necessary to cancel the tax avoidance and, secondly, to restrict the application of the rule to cases in which the UK tax advantage represents the main purpose, excluding cases where that is one of the main purposes. 
The first of those two changes is not necessary because subsections (14) to (16) allow a company to make an adjustment to its self-assessment in order to cancel out that part of the deduction that relates to tax avoidance purposes. That prevents the clause from having any further effect while ensuring that the UK tax avoidance has been effectively cancelled out. That approach ensures that the legislation is properly targeted on avoidance of UK tax. 
The second change would limit rule A to cases where UK tax avoidance is the main purpose of a scheme, excluding cases where it is one of the main purposes. I have explained why such an amendment is inappropriate in the context of clause 24; we had a long debate about it. The same reasons for rejecting such an amendment apply in this case and I will not repeat them. 
Putting that aside, the amendments would not be effective in limiting the scope of rule A, because amendment No. 34 refers to all the deductions arising from the scheme. By contrast, as I mentioned, the clause already goes further than that by limiting the scope of the rule so that it only goes as far as is necessary to counteract tax avoidance. 
Amendment No. 35 would remove the subsection relating to the interaction of the arbitrage rule with any equivalent provision enacted elsewhere. It is rather strange for the Opposition to try to link our tax system and make it consequential on tax systems outside the UK. As it stands, the clause ensures that the legislation applies where there is UK tax avoidance. The amendment would mean that the deduction provisions would become dependent on laws passed in other countries, and so UK deductions intended to gain a UK tax advantage would not be restricted if another country passed legislation similar to that introduced in the UK. That is clearly not acceptable—not even, I would have thought, to the Opposition. The counteraction of UK tax avoidance is a matter for our own law, not that of other countries. It is a matter for us to decide, and that is provided for in the rules. 
In summary, amendments Nos. 32 to 34 are unacceptable as they would weaken the clause, and amendment No. 35 is not acceptable because it would make the counteraction of UK tax avoidance dependent on other countries' laws. I commend the Government amendments to the Committee, and if the hon. Gentleman seeks to press his amendment to a Division, I shall ask my hon. Friends to oppose it.

Philip Hammond: I am a little surprised by what the Paymaster General said about amendment No. 35. She said that it was unacceptable and outrageous to suggest that the operation of our legislation should be made dependent on legislation  in other jurisdictions, but surely the clause is necessarily dependent on the regime operating in other jurisdictions. What if a double deduction is occurring, and thus a disallowance of deduction occurs under the Bill, but the other jurisdiction—that in which the other half of the double dip occurs—changes its law, so that no deduction is allowed in the other jurisdiction? Surely, logically, the Bill will cease to apply to that transaction, because there has to be a double dip before there is a tax advantage.
The Government are clearly happy to contemplate making law that applies only as a consequence of a regime that exists elsewhere. The specific question in relation to amendment No. 35 is whether it is equitable that the taxpayer is penalised in the UK because he is deemed to have enjoyed a deduction elsewhere when in fact he has not done so because a law—not some terrible tin-pot country's law, but one broadly similar to the Bill, the merits of which the Minister is trying to persuade us—is in force in that other jurisdiction. That seems a little odd. Unless I have misunderstood, it would result in the taxpayer's effectively being double taxed. Instead of having a double deduction, he would have no deduction in either jurisdiction. I am a little surprised that the Paymaster General considers that acceptable. As she intends to return to such matters, I shall carefully read what she said in the record. I am grateful for her explanation of the Government's amendments. 
Government amendment No. 73 represents a substantive change. It would expand the scope of the subsection. It does not seem to me to cause a problem, but one thing that I have learned about the Bill is that the most minute change can apparently have enormous consequences. It will therefore be important to see whether people outside the House have anything further to say about the matter in response to the right hon. Lady's explanation. For the moment, I beg to ask leave to withdraw the amendment. 
Amendment, by leave, withdrawn. 
Amendments made: No. 70, in clause 25, page 22, line 5, leave out 'same expense' and insert 'expense in question'. 
No. 71, in clause 25, page 22, line 5, leave out from 'be' to 'for' in line 6 and insert 
'otherwise deducted or allowed in computing the income, profits or losses of any person'. 
No. 72, in clause 25, page 22, line 11, leave out from 'amount' to 'for' in line 12 and insert 
'otherwise deducted or allowed in computing the income, profits or losses of any person'. 
No. 73, in clause 25, page 22, line 34, leave out 'For the purposes' and insert 
'Without prejudice to the generality'. 
No. 74, in clause 25, page 22, line 36, leave out 'is' and insert 
'shall be treated for the purposes of subsection (6)(c) as'.—[Dawn Primarolo.] 
Question proposed, That the clause, as amended, stand part of the Bill.

Philip Hammond: The clause deals with the rules to be applied when a notice is issued. I draw attention again to the different requirements for a notice to be issued and for a taxpayer to have to comply with it or do anything under it. A notice can be issued if the Revenue considers that conditions A to D may be satisfied. The Government are placing the onus on the taxpayer to determine whether the conditions apply under subsection (1)(b). The Paymaster General has not yet reassured us that there is not scope for the provision to become the basis for fishing expeditions by the Revenue.

Dawn Primarolo: That matter has come up a couple of times. I have explained the position, but I shall try once more. There is no provision in the clause that will allow, encourage or lead to Her Majesty's Revenue and Customs going on what the hon. Gentleman described as a fishing expedition.

Philip Hammond: I am grateful to the Paymaster General for placing such matters on the record. I must confess that I cannot see anything in the Bill that prevents such action from happening, although I am willing to accept her assurance that that is not her intention. No doubt her words will be scrutinised carefully.
Subsection (2) requires that any amount that is deducted outside the United Kingdom or that would have been deducted were it not for the operation of a similar set of rules is disallowed in the company's tax computation. Notwithstanding the Minister's protestations to the contrary, it looks to us as if the UK is setting itself up as the world's arbitrage policeman. I will not go through the arguments again, but I am still concerned to get a clear answer to this question. 
Would the provision apply even in a straightforward structure, in which the US parent company received a deduction for the interest cost incurred by its UK subsidiary, but also consolidated into its US income the income received by that UK subsidiary? I have still not received a clear answer. It seems to me that a circumstance like that—a straightforward deduction of the interest cost in the UK and then a consolidation in the US that involves a deduction of the interest cost against the consolidation of the UK income in the US—is a perfectly acceptable transaction, and that it should not be considered to have given rise to a tax advantage and therefore should not provoke any action under the Bill. I shall be grateful if the Paymaster General will confirm that. 
I have another question for the Paymaster General. Given that she said a few minutes ago that it was wholly unacceptable for UK legislation to depend for its effect on what is done in another jurisdiction, why is an exemption given under subsection (10)(2), under which an exemption qualifies 
''if it is conferred by a provision contained in or having the force of an Act or by a provision of the tax law of any territory outside the United Kingdom.''? 
That seems to be the very thing that the right hon. Lady said was not acceptable. 
A change in the tax law of another jurisdiction could determine the way the UK tax law was applied. As I read it, an entity could become exempt by virtue of being made exempt in another jurisdiction. Is that not a potential loophole that tax planners would seek to exploit if another jurisdiction, perhaps less prudent than the UK, were to facilitate tax planning arrangements by granting appropriate exemptions? The Paymaster General may say that other anti-avoidance legislation would deal with that situation, but it seems a rather obvious gap in our armoury. 
The basis on which a company must assess its tax advantage is dependent on an assessment of what it would have done had the hybrid structure or instrument not been used. We have touched on that essential question before, but we still have not established how in practice that calculation will be done. Where are the comparables to come from? They have to be outside the arbitrage rules; those inside explicitly cannot be used. How can companies document their procedures so that if challenged later to make that computation—that calculation of tax advantage—they can do so properly? Is it not an open invitation to contrived decision-making processes, with people holding meetings about things that they want to be on the record, while the things that it is inconvenient to have on the record are discussed off the record? 
Such things happen in other areas. I am sure that in today's freedom of information environment, they probably happen in Government Departments; certain things are not discussed in case they fall foul of disclosure rules under freedom of information legislation. It seems quite a burden to impose on businesses. Even in the early stages of evaluating an investment project, they will have to be very careful about how to phrase reports of discussions. At worst, it will invite contrived and cumbersome recording of the decision-making process. At best, it will impose an additional burden on companies by not allowing them to discuss openly the issues that a well-advised board needs to discuss to make proper investment decisions. The danger is that the board will discuss the things that will look good on a piece of paper in the future, rather than the things that need to be discussed to make a proper and well-informed business decision. 
I say to the Minister again that our fear is that that danger of dealing in the United Kingdom jurisdiction might, at the margin, persuade some investors to seek an alternative location for their investment. That is the unintended damage that we are trying to avoid.

Dawn Primarolo: The hon. Gentleman has a dim and gloomy view about the practices of companies operating in the UK. He suggested that they might manipulate their records to conceal the true design of their decisions. If a company is not using its structures, for the main purpose, for UK tax avoidance, it need worry about nothing.
I am sure—because he said so—that the hon. Gentleman does not mean to imply that companies will doctor their minutes to make it appear that they have done one thing when they have actually done  something else. The points that he is making are not being made to HMRC. It could be argued that companies would not come forward and that we were driving them to falsify the record of their decision-making process. This is reaching the point of being ridiculous, if the hon. Gentleman will excuse me for saying so. 
The rules require that when a notice is issued for the purposes of arbitrage legislation—as we debated under clause 24—and a company is told that it must take account of the arbitrage rules when conducting its self-assessment, the decisions are made when the return comes in. It is clear from all the discussions that we have had that consequences would follow, and we are trying to indicate how that would happen in subsequent clauses. That is perfectly straightforward. 
It is difficult to carry on answering hypothetical examples that outside bodies are not telling the Government are occurring, as the hon. Gentleman said they were, in the real world. He is raising highly complex propositions in Committee without our knowing what all the connected relationships are and expecting the Minister in 30 seconds to give the tax advice on what the multinational could do. He has done that again with his example of the US parent and its deduction. 
I am going to spare the hon. Gentleman's blushes by not pointing out that a lot of other tax considerations would also impinge on any decision that such a company might make—I shall take the example at face value. If the same income and deductions are double counted, it is difficult to see what the UK tax avoidance is. Depending on the exact circumstances of the case, if no UK tax advantage were being obtained, the legislation would not apply. That is precisely how all these clauses link together. However, the hon. Gentleman should not leave the Room thinking that that is the answer to the case, because it would have to be caveated, as I am sure the hon. Member for Braintree knows, by what else the parent was doing and how it was structured and how it interacted with the tax system. 
In relation to arbitrage and the rules, a notice is issued and a company is basically told, ''This is an extra prompt to you. Take note of this legislation. These are the contrived schemes we know about. Do not fall foul of them. Make sure that the company does not use those contrived mechanisms when it conducts its self-assessment.''

Philip Hammond: I have to set the record straight. Of course I was not suggesting that companies would falsify their records. Actually, the situation is much worse than that. I take it that the companies probably would not be companies in the UK; they would be companies outside the UK considering making investments in the UK. Proper debate and appraisal might become difficult or impossible, with the consequence that it was decided that it was better to appraise an investment opportunity in another jurisdiction.
I cannot remember whether the right hon. Lady used the term ''ridiculous'' or ''absurd'', but if she thinks that it is a ridiculous proposition that the  passing of legislation that gives specific relevance to an historical discussion of alternatives will colour the nature of those discussions, she is not living in the real world. If I told her tomorrow that her discussions with officials about the response that she intended to make to our amendments next Tuesday would be published on her departmental website, they would be different discussions from the frank and open discussions that she usually has, and quite rightly. I do not blame her for that.

Dawn Primarolo: I will not rise to the point about the Government, but the fundamental difference with the tax system is that it is predicated on confidentiality. Anything that transpires between the tax authorities and the company is a matter for them only. Ministers and the public do not have access to the information; it is protected. Any information that is confidential and not relevant to the tax authorities is also protected by statute, so there is no way a company would have anything to fear from disclosing the correct information to the Revenue. It cannot be used in any other way. That is clear and is how the department has operated over generations.

Philip Hammond: My understanding is that, in computing the correct amount to show on its self-assessment, having received a notice, the company will properly look at the UK tax advantage that it has gained. To compute the UK tax advantage—the Paymaster General will correct me if I am wrong—the company will be required to consider what it would have done had it not used the hybrid qualifying structure. That will require it to consider how it made its investment decision in the first place, whether alternative structures were considered and what the tax consequences of those structures would have been. I do not think that that is particularly controversial. Our concern is that, if there is a requirement to compare what has been done or is being done with what might have been done, it will inevitably be necessary to look at the historical records relating to the original decisions.
If the Paymaster General is telling me that the Revenue would not seek to see those records, or would not expect a company to produce them in order to substantiate the approach that it took in reaching what it considered to be correct self-assessment of its liability after having the deduction partially disallowed, that is another matter, but I do not think that she is saying that. 
This is an important issue. I cannot say why other people have not raised it with the Paymaster General before, but this is a Standing Committee, and we must consider these matters. Of course we take advice from outside. The Paymaster General will have many other sources of information and comment on the Bill, but it would not be good if we could not raise issues in Committee, or if we were browbeaten into not raising them in Committee, simply because people outside the Committee have not raised them with Ministers before. 
I conclude my remarks, but I still do not believe that the issue has been fully addressed.

Frank Cook: I am afraid that I am forced to comment. The questions that it has been felt necessary to raise are on record, and I have allowed them. The Minister's responses have been heard and are recorded, too. That is all that the Chairman must do in this regard, and there should be no question about that.
Question put and agreed to. 
Clause 25, as amended, ordered to stand part of the Bill.

Clause 26 - Receipts cases

Philip Hammond: I beg to move amendment No. 36, in clause 26, page 24, line 6, leave out 'E' and insert 'G'.

Frank Cook: With this it will be convenient to discuss the following amendments: No. 38, in clause 26, page 24, line 22, after 'income', insert
', capital gain, or chargeable profits computed under section 747(3) of ICTA,'. 
Government amendment No. 75 
No. 39, in clause 26, page 24, line 38, leave out from 'company' to end of line 39 and insert 
'in an accounting period within two years from the date on which the qualifying payment was made.'. 
Government amendment No. 76 
No. 40, in clause 26, page 24, line 41, leave out 'a corresponding' and insert 'an'. 
No. 41, in clause 26, page 24, line 41, after 'period', insert 
'ending within two years from the date on which the qualifying payment was made.'. 
Government amendment No. 77 
No. 42, in clause 26, page 24, line 41, leave out 'or'. 
No. 43, in clause 26, page 24, line 45, after 'obligations)', insert ', and 
(d) income or gains which are included within chargeable profits of a controlled foreign company and the company is subject to a charge in accordance with section 747(4)(a) of ICTA or is exempt from an apportionment under section 747(3) ICTA due to the company meeting the conditions of section 748(1)(a) ICTA.'. 
No. 44, in clause 26, page 25, line 2, leave out 'benefit' and insert 'UK tax advantage'. 
No. 45, in clause 26, page 25, line 3, at end insert— 
'(10A) Condition F is that the main purpose of the scheme is to achieve a UK tax advantage for the company. 
(10B) Condition G is that the amount of the UK tax advantage in question is more than a minimal amount'. 
No. 37, in clause 27, page 25, line 24, leave out 'E' and insert 'G'.

Philip Hammond: I shall deal with the group of amendments in three separate sub-groups, because they deal with three separate things.
Amendments Nos. 36, 37 and 45 seek to insert into clause 26 a motive test similar to the one that is already evident in clause 24. It is the same test, but a UK tax advantage is gained that is not minimal. I know that the Revenue's suggestion in the explanatory notes is  that that is unnecessary, because there will always be a tax advantage motive in receipts cases. Even if that were true, however, the Revenue could know that only by examining existing disclosed cases. 
The suggestion is that the amendment would give the taxpayer another layer of protection, even if the motive test were satisfied in every case, but it would also futureproof the legislation. The Paymaster General told us today about terrible things that have been disclosed under the Finance Act 2004, which evidently were not known to the authorities before because the Revenue has had to rush to legislate to deal with them. It is rather drastic to say that everything that falls within the scope of clause 26 will necessarily always have a main purpose of gaining a UK tax advantage. 
I therefore urge the Paymaster General both to futureproof the legislation and to avoid preventing newly developed structures that do not have a principal purpose of gaining a UK tax advantage from being caught by the legislation. I do not know what those structures might be, but we have a very innovative financial community, and it would be a brave person who said that, because this is an empty set at the moment, it will always remain empty. 
Amendments Nos. 38 and 43 seek to prevent double counting and ensure an appropriate priority of application of the legislation, by providing that the rules do not apply where the receipt side of the transaction is already taxed as capital gain or under CFC—controlled foreign company—legislation. That would be done by inserting new subsection (9)(d), defining an additional class of non-qualifying payments. 
Amendment No. 44 is a probing amendment and substitutes ''UK tax advantage'' for ''benefit'' in subsection (10), which is consistent with what we seek in amendments Nos. 36, 37 and 45. Can the Minister confirm what we are to understand by ''benefit'' in subsection (10), if it does not refer to UK tax advantage? 
Amendments Nos. 39 and 42 seek to counter the requirement that to be outside the rules a receipt must be taxed in the year of deduction. There might be reasons why the taxation of a receipt takes place, for example, the following year. Unless the Paymaster General has a precise reason why, in order to prevent further avoidance, a rule should specify that the receipt must be taxed in the year of deduction, we propose a provision that allows the period to be extended by up to two years after the year of the assessment of the deduction. The important thing is that there should be a corresponding taxable receipt. Whether it comes in the same year or the following year is less important. 
The Government amendments seem unexceptionable and even slightly beneficial in that, if I interpret them correctly, they narrow slightly the scope of the provisions.

Dawn Primarolo: Clause 26 sets out the conditions that must apply before a receipt is caught by the provisions. There are five conditions, which result in  the provision having a much narrower application to receipts than to deductions. The Government have taken targeted action to tackle particular avoidance schemes that we have identified, so that we have direct and specific rules. That relates to a point that the hon. Gentleman raised in an earlier debate about why all legislation was not drafted in that way. As I told him then, the question is: what is the most appropriate way to deal with the disclosure before us?
The clause identifies payments that are allowable as a deduction for the payer which adds the capital value of the recipient, but which would not otherwise be taxable for the recipient. As with deductions, the rules will apply only where a notice has been issued to the company by HMRC. There is an overlap between the operation of those rules and those proposed in clause 39, on financial avoidance. The Government are not necessarily concerned if a transaction is caught by more than one piece of anti-avoidance legislation. To paraphrase Oscar Wilde, to be caught by one anti-avoidance rule might be looked on as a misfortune; to be caught by two looks like carelessness. 
However, the Government also recognise that the existence of a double charge to remedy the avoidance is inappropriate where one charge can be eliminated without putting the other at risk. The elimination of the arbitrage charge where there was already a charge under the financial avoidance legislation was made clear in the statements published when the legislation took effect. However, there is a difference between the two sets of rules, both in method and in terms of the person on whom the charge can fall. 
The Government amendments ensure that that difference is correctly identified by the legislation, and that no charge will arise under the arbitrage rules if the financial avoidance rules are in point. Business has asked for certainty on this matter, and the amendments provide that. 
There are 10 Opposition amendments, all of which would amend or add to the conditions that need to be met for the receipts part of the provision to apply. Amendments Nos. 36, 37, 44 and 45 seek to amend condition E, and to add new conditions F and G. The overall aim is to introduce a main purpose test into clause 26. We have already discussed the purpose-based provisions relating to deductions, but the Government do not consider that any purpose test is needed or appropriate in the context of the receipts rules. In the narrow circumstances set out in the clause, it is appropriate that the receipt should be taxed in the normal way. The receipts rules will apply in similar situations as the financial avoidance rules, where a UK company receives shares on deferred payment terms. The company acquiring the shares pays more to compensate the UK company for the late payment. 
In that situation, it is right that the UK company receiving the additional amount should be taxed to reflect its receipt or compensation for the late payment. There is no need for a purpose test. As with the financial avoidance rules, the legislation identifies that it is proper to tax, and brings an appropriate amount into charge—it is targeted. 
Amendment No. 38 seeks to amend condition C. Condition C requires the qualifying payment to be tax deductible. That reflects the fact that the provisions are targeted at deliberate exploitation of arbitrage—in this case, the exploitation of potential mismatches between taxable deductions and non-taxable receipts. 
There is an exemption in the legislation for financial traders who buy and sell shares on trading accounts. Without the exemption, they might be inadvertently caught by the rules when they purchase shares by way of their trade and receive a tax deduction for the cost. The amendment seeks to extend that exemption to all payments that are set against any capital gains or CFC profits. 
The inclusion of such additional payments would undermine the purpose of condition C itself, making the clause inoperable as a large number of schemes would fall outside the scope of the rules. There is no reason to treat capital gains more favourably than income, and it is unclear in what circumstances the suggested exemption for CFCs would be needed. In any case, there can be no justification for treating a CFC, which is by definition set up for tax avoidance purposes, more favourably than other companies. 
Amendments Nos. 39 to 43 would amend condition D, which excludes amounts that are taxed in a corresponding accounting period—defined as any identical or overlapping accounting period. Amendments Nos. 39 to 41 seek to extend that, so that receipts are excluded if they are taxed in any accounting period ending within two years of the qualifying payment being made. Amendments Nos. 42 and 43 seek to extend it to include receipts brought into account by virtue of the UK's CFC rules. 
There is no good reason to extend the time limit in that way. To do so would cause considerable uncertainty and might make the rules unworkable. It would also give rise to timing mismatches, which in the case of large amounts could be valuable in themselves. The rules are drafted so that HMRC will be in a position to know, when the company makes its return, whether a receipt is already within the charge to tax, and to issue a notice if necessary. If the period is extended to two years, as proposed by the amendments, HMRC will not know that at the time of the making of the return and may not know until after the 12-month period for making an inquiry has come to an end. 
There is similarly no good reason to extend the category of receipts to include those brought into account by virtue of the UK's CFC rules. Condition D is designed to prevent double taxation of the same receipts. The CFC rules are designed to prevent tax-motivated diversions of profits outside the UK tax net. If the receipt is taxed under clause 26, the profits will not have been diverted outside the UK tax net, so there is no reason why the CFC rules will apply and, therefore, no potential double taxation. 
I commend the Government's amendments to the Committee. I have dealt with amendment No. 44. If  the hon. Gentleman seeks to press his amendment to a vote, I will ask my hon. Friends to vote against.

Philip Hammond: I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn. 
Amendments made: No. 75, in clause 26, page 24, line 35, after '(9)', insert 'or (9A)'. 
No. 76, in clause 26, page 24, line 39, at end insert 'or'. 
No. 77, in clause 26, page 24, line 41, leave out from 'period' to end of line 45 and insert— 
'(9A) This subsection applies to an amount that is taken into account in determining the debits and credits to be brought into account by a company for the purposes of Chapter 2 of Part 4 of FA 1996 as respects a share in another company by virtue of section 91A or 91B of FA 1996 (shares treated as loan relationships).'.—[Dawn Primarolo.] 
Question proposed, That the clause, as amended, stand part of the Bill.

Philip Hammond: I have a couple of questions for the Paymaster General. Would the wording of subsection (12) have the same meaning and, perhaps, be clearer if it read that for the purposes of this section a payment is a qualifying payment in relation to a company if and only if it constitutes a contribution to the capital of the company? That is clearly what the guidance notes suggest. A possible and initial interpretation was that it possibly added to the scope, and certainly defined the scope of a qualifying payment, not necessarily excluding any other type of payment. Clarification by the Paymaster General would be helpful.
Can the Paymaster General clarify whether a contribution to the capital of the company, which the guidance notes suggest means an increase in the capital of the company, is to be read narrowly in terms of the share capital of the company, in a straightforward, conventional sense? In particular, can she clarify that it is not the case that any increase in profits that increases shareholders' funds by way of retained profit could be argued to be an increase in capital? I think that she will have no difficulty giving me that assurance, but I would be grateful. 
The broader question underlying clause 26 that concerns us is how much these structures that are now being attacked provide UK-based investors with an advantage that overseas investors already have when competing for third country outward investment opportunities. I understand entirely that Treasury Ministers do not like structures that allow the creation of a UK tax advantage. However, in the world we live in, if our companies are competing to make investments in third countries where multinational competitors have such tax advantages, and we deny them to our companies, we have to accept that there will be consequences, in terms both of the success of UK-based companies and of the attractiveness of the UK as a location for such multinational outward investors. 
The Paymaster General will see that legislation such as that on the substantial shareholding relief, which was introduced to encourage companies to use the UK as a base for head office operations and holding operations for overseas subsidiaries, tends to pull in the opposite direction from the thrust of the clause. Will she tell the Committee, with hand on heart, that the clause will not act as a deterrent to multinational companies to base their regional operations for outward investment in the regions of the United Kingdom? The UK has a significant relative advantage in this important are as a result of the English language and of its sophisticated capital markets. 
The Paymaster General might like to close the opportunity to obtain interest relief that she feels is unjustified. However, the question is not whether it is justified, but whether our competitors are able to obtain that relief in other jurisdictions and whether we are putting ourselves at a disadvantage by doing so. That is my concern.

Dawn Primarolo: On the first point, the answer is no. If the relief is something else, that does not mean it stops being a contribution to capital.
I hesitate before dealing with the hon. Gentleman's other points. In opposition, I sat on three Finance Bills that proposed wide anti-avoidance measures. Conservative Ministers rightly argued that we need a fair tax system in the UK for all taxpayers. 
I have never heard a Conservative spokesperson argue that tax avoidance gives the United Kingdom a competitive advantage, so I am perplexed that the hon. Gentleman keeps returning to the matter. He supports the disclosure rules and agrees that action should be taken under them. He prefers the rules to be targeted whenever possible, as they are under the clause, and he accepts the difficulties of purpose tests when that cannot be achieved. He has been reassured that appeal rights are in place, that companies will be properly notified and that innocent parties will not be hit, yet still he argues that allowing avoidance somehow ensures that our economy is competitive. I do not agree with him and do not propose, if he raises the matter again, to respond to his points. 
Question put and agreed to. 
Clause 26, as amended, ordered to stand part of the Bill.

Clause 27 - Corporation tax starting rate and fraction for financial year 2004

Question proposed, That the clause stand part of the Bill.

Philip Hammond: Let us see whether we do any better on this clause, Mr. Cook.
Will the Paymaster General clarify why income arising under subsection (2) is chargeable under case 6 of schedule D? Why is it not chargeable under case 3?

Dawn Primarolo: Because case 6 is the relevant place if we are to make the legislation work.
Question put and agreed to. 
Clause 27 ordered to stand part of the Bill.

Clause 28 - Notices under sections 24 and 26

Amendment made: No. 29, in clause 28, page 26, line 24, leave out 'have been reasonably' insert 'reasonably have been'.—[Mr. Philip Hammond.] 
Question proposed, That the clause, as amended, stand part of the Bill.

Frank Cook: With this it will be convenient to discuss the following:
New clause 1—Advance clearance— 
'(1) This Chapter shall not have effect in respect of any company falling within either section 24(1) or section 26(1), in any case where the commissioners for Her Majesty's Revenue and Customs have on application of the company notified the company that the Board are satisfied that the transaction does not have a main purpose of achieving a UK tax advantage. 
(2) Any application made under subsection (1) above shall be in writing, delivered either by post or by electronic mail, and shall contain particulars of the operations that are to be effected and the Commissioners may, within 30 days of the receipt of the application or of any further particulars previously required under this subsection, by notice require the applicant to furnish further particulars for the purpose of enabling the Commissioners to make their decision and if any such notice is not complied with within 30 days or such longer period as the Commissioners may allow, the Commissioners need not proceed further on the application. 
(3) The Board shall notify their decision to the applicant within 30 days of receiving the application or, if they give a notice under subsection (2) above, within 30 days of the notice being complied with. 
(4) If the Commissioners notify the applicant that they are not satisfied that the transaction in question does not have a main purpose of achieving a UK tax advantage or do not notify their decision to the applicant within the time required by subsection (3) above, the applicant may within 30 days of the due date for a decision in accordance with this section require the Commissioners to transmit the application, together with any notice given and further particulars furnished under subsection (2) above, to the Special Commissioners and in that event any notification by the Special Commissioners shall have effect for the purposes of subsection (1) above as if it were a notification by the Commissioners. 
(5) If any particulars furnished under this section do not fully and accurately disclose all facts and considerations material for the decision of the Commissioners or the Special Commissioners, any resulting notification of a decision by the Commissioners or Special Commissioners shall be void.'. 
New clause 2—Right of appeal— 
'Appeals against a notice issued by the Commissioners of Her Majesty's Customs and Revenue under section 24 or section 26. 
(1) Any company to whom a notice has been given under section 24 or 26 may within 30 days by notice to the Special Commissioners appeal on the grounds that section 24 or section 26, as appropriate, does not apply to the company in respect of the transaction or transactions in question, or that the adjustments directed to be made are not appropriate adjustments. 
(2) If the Commissioners or the company are dissatisfied with the determination of the Special Commissioners the company or the Commissioners may, on giving notice to the clerk to the Special Commissioners within 30 days after the determination, require the appeal to be re-heard by the tribunal, and the Special Commissioners shall transmit to the tribunal any document in their possession which was delivered to them for the purposes of the appeal. 
(3) Where notice is given under subsection (2) above, the tribunal shall re-hear and re-determine the appeal and shall have and exercise the same powers and authorities in relation to the appeal as the Special Commissioners might have and exercise, and the determination of the tribunal thereon shall be final and conclusive. 
(4) On an appeal under subsection (1) and (3) above the Special Commissioners or the tribunal shall have power to cancel or vary a notice under section 24 or section 26 of this Act, or to vary or quash an assessment made in accordance with such a notice, but the bringing of an appeal or the statement of a case shall not affect the validity of a notice given or of any other thing done in pursuance of those sections pending the determination of the proceedings.'.

Philip Hammond: Clause 28 deals with the procedural rules for companies that are subject to a notice under clauses 24 or 26. I do not have a tremendous amount to say about clause 28, but our new clauses have been grouped with it. We aim to resolve the uncertainty that we are told still exists by introducing a binding statutorily provided advance clearance regime that, if operated efficiently and consistently, will quickly restore taxpayers' confidence.
New clause 5 sets out a procedure for advance clearance on application to the commissioners. Subsection (1) would remove companies that have sought and received advance clearance from consideration under clauses 24 and 26; subsection (2) states that any application made under subsection (1) can be in writing, delivered by post or electronic mail, and shall contain particulars of the operations that are to be effected. There is also a provision within subsection (2) to allow the commissioners to require further details for the purpose of their decision within 30 days of the receipt of the application or of any further particulars previously required. It tries to keep the process moving fairly speedily. 
There is also provision that if such requested information is not received within 30 days of the applicant being required to give it, and if any such notice is not complied with within 30 days or any longer period that the commissioners may allow, the commissioners need not proceed further. In other words, they may treat the taxpayer as having abandoned the application. 
Subsection (3) requires the commissioners to notify the applicant of their decision within 30 days, or, if they have requested more information, within 30 days of the receipt of that information. Subsection (4) gives the applicant a right to refer any rejected application to the special commissioners who have the power to give clearance in the same way that the commissioners do, and subsection (5) makes any decision by the commissioners or special commissioners void if information provided by the company is not accurate or does not accurately disclose all the facts. 
Since the Finance Bill was published before the election it has been changed and the guidance notes now state that there will be a clearance regime, albeit not one with any statutory force. We welcome the introduction of the clearance regime that the Government have announced, but we recommend that such clearances be within a statutory framework, provided that the clearance, if obtained based on accurate and full information, is binding on the Revenue by statute for a period of time. 
Practitioners tell me that some of the existing non-statutory clearance methods work better than others from a taxpayer's point of view. I say that to be  consensual. That is why we seek to include a statutory provision in this case. The new clause would enable taxpayers, when implementing a financing structure for their UK or overseas investments, to get advance clearance from the Revenue. That would give the taxpayer certainty rather than considerable uncertainty, which the new rules might otherwise create. 
Guidance notes are no guarantee of certainty and the existence of those notes leaves a great deal of room for interpretation. The taxpayer has the additional problem that guidance notes can be withdrawn or redrafted at any time; the taxpayer always has to face the possibility of a change in the guidance that governs the effect of any part of the legislation. 
The rules that we propose mirror those for pre-clearance of share reorganisations and the transactions and securities legislation. I note that most jurisdictions, including the United States, Australia, New Zealand and the Netherlands, have advance clearance systems to obtain pre-transaction binding rulings for such transactions. Such a clearance system is intended to be a practical way for taxpayers and the Inland Revenue to achieve certainty and avoid complicated arguments at a later date. 
Another example has come to my attention today. Apparently, the Belgian authorities have now taken steps to implement a decision that was taken in 2003 to give Belgium what they describe as 
''an efficient, proactive and flexible ruling practice''—
this is the interesting part— 
''in order to remain attractive for foreign investors and to provide the necessary certainty to Belgian taxpayers.'' 
As I have conducted my preparatory discussions in the past few weeks, it has surprised me how often Belgium has come up.

Dawn Primarolo: The hon. Gentleman has no idea.

Philip Hammond: The right hon. Lady, who has knowledge of Belgium, expresses some reaction to that. I remember working occasionally in Belgium a decade or so ago when, it would be fair to say, the country was not characterised as a place that was radically reforming its legislation to make itself more flexible and dynamic. However, it is interesting that some of the countries that had developed somewhat rigidly structured regimes that were not business friendly have now realised that to compete they have to change their regimes and make themselves more attractive to business.
One trap that we sometimes fall into in this place is stereotyping. We have ideas about different countries and how responsive to business their regimes are, but the world can change quickly and we can find that countries that were traditionally regarded as business friendly have allowed themselves to lag behind—I name no names; Committee members will draw their own conclusions—while others that were traditionally regarded as not particularly business friendly have galvanised themselves, not for fun or to risk losing tax revenue that would otherwise have benefited their taxpayers, but because they have worked out that having a more business-friendly environment that  encourages investment and inward business location leads in the medium term to more revenue rather than less and thus a greater ability to provide the good quality public services that people in all countries, western, advanced or otherwise, want.

Christopher Huhne: I am grateful to the hon. Gentleman for drawing international parallels. We broadly support the new clauses, so does he agree that there are also precedents within United Kingdom statutes—for example on the taxation of capital gains—that we could commend to the Minister?

Philip Hammond: I am sure that the Minister will explain why the Government think that, in this case, a non-statutory regime is preferable. It is important to have that debate, because, as the hon. Gentleman will know, there are many people outside the Committee and many practitioners in the field who believe that the Bill, because of its complexity and potential for genuine uncertainty, if not disagreement, is a good candidate for a statutorily enforceable pre-clearance regime.

Rob Marris: The new clause is a plucky little measure. Is the hon. Gentleman proposing that there should be a charge, or will it be free tax and accountancy advice for multinational companies?

Philip Hammond: It is not free tax advice. The experience of pre-clearance regimes shows that if they work properly, they save resources on both sides. The Revenue has limited resources. If a pre-clearance regime is working properly, the Revenue, having agreed in advance the details of how that scheme will be treated, will not have to spend large amounts of time trawling taxpayers' returns to ascertain whether they comply with the scheme. A pre-clearance regime is intended as a protection for the taxpayer, although I suggest that it could also be of benefit to the Revenue. However, its principal purpose is neither of those, but to ensure that we do not inadvertently inflict a negative burden on the UK economy through the creation of uncertainty and that we maintain the UK's position as a relatively attractive place for inward investment.
New clause 2 aims to enable the taxpayer to have a clear right of appeal against a Revenue notice per se. If I have interpreted the Bill correctly, the Minister will tell me that there is a right of appeal because the taxpayer in receipt of a notice will do what he has to do—make his self-assessment return—and if the Revenue disagrees with it, the right of appeal will arise in the normal way. I understand that perfectly. 
However, we would rather that there were the ability to appeal against the issue of a notice, rather than just against the assessment. Subsection (1) gives a company given a notice under clause 24 or 26 30 days to appeal to the special commissioners on the grounds that those clauses do not apply to them in respect of the transaction or transactions in question. Subsection (2) gives both the company and the commissioners the right to appeal against a decision by the special commissioners within 30 days of the determination of the appeal. 
The company or the commissioners can require the appeal to be reheard by the tribunal. Special commissioners must transmit any relevant documents that they have to the tribunal for the purpose of that rehearing. Subsection (3) gives the tribunal the same powers that the special commissioners have under subsection (1), and subsection (4) defines the power of the special commissioners and the tribunal with regard to altering or cancelling a notice under clauses 24 or 26. They will have the power to alter or cancel a notice, or vary or quash an assessment made in accordance with such a notice. I accept that they would have a power to vary or quash an assessment under the present appeal regime, but they would not have the power to cancel the notice. 
The Minister will tell us that a notice does not really matter and ask why anyone would want to appeal against one, or have one withdrawn. However, a company may wish to establish that a notice has been wrongly issued and does not fall within the scope of the legislation, not only for the purposes of the immediate transaction in hand but for gaining certainty about that transaction or class of transaction. We see no logical reason why there should not be a properly defined appeal procedure against the issue of a notice, just as there is such a procedure against the issue of an assessment.

Dawn Primarolo: I was very interested in what the hon. Gentleman said, and particularly in the length of time he took to cover even the bullet points of his two new clauses—one can only imagine what it would take to make them work in the legislation. As I was listening, I mused on both his new clauses. What exactly would they add in principle? The hon. Gentleman talked about the principle, but did not tell us what it was. What rights for and services to the taxpayer that are not already provided for would the new clauses add? To pose it the other way, what do they add for the poor taxpayer? More legislation—

Philip Hammond: You are a fine one to talk about more legislation.

Dawn Primarolo: The Opposition are always talking about not wanting more legislation, but here they are adding it when it is not necessary. They should not be surprised when I point that out to them.
It is a brave individual who will go to a multinational with a highly complex deal and explain that the time delays involved in new clause 1 in getting their clearance are worth it. Those multinationals will have a lot to say about competitiveness, speed of business and how to attract inward investment. The hon. Gentleman's proposal adds nothing to what is already in the legislation, and I shall explain why. 
To provide the certainty of the effect of the legislation, HMRC has published guidance and is accepting applications in an informal clearance procedure. The difference between formal and informal is whether the procedure is legislated for, but I am talking about what it actually does—the hon. Member for Braintree and I had an exchange a long time ago about the procedure being binding. HMRC's informal clearance procedure is for applications on a pre or post-transaction basis. 
By adopting an informal process, which works well for other anti-avoidance measures, companies are provided with the flexible system that they want, under which they will not feel obliged or pressured to seek formal clearance in every case, with all the costly bureaucracy and fees that go with ensuring that their approach is agreed. Instead, they need only ask for assistance when they are uncertain of the operation or application of the rules. The process will also provide certainty for HMRC and will make it clear that it considers itself to be bound by its clearance, as I said to the hon. Member for Braintree earlier. That was also confirmed by my hon. Friend the Financial Secretary to the Treasury on Second Reading. 
There is a clearance procedure if a company is in doubt, and it will do all the things that the procedure proposed by the hon. Member for Runnymede and Weybridge suggests—and faster. If we had a formal procedure pushing all applications into the system, regardless of whether there is doubt, there would be more in the system to be considered so one would have to talk about time periods, as the hon. Gentleman has with his proposed new clause. Frankly, I would love to be in the room when the hon. Gentleman tells a multinational company with a highly complex deal on which it wants clearance that it will take a maximum of 30 days to sort it out. Companies will probably want it to be sorted out a little faster than that—that is what they currently tell the Revenue. What is the difference between the procedures? The only difference is that the hon. Gentleman wants the procedure written in legislation, but then it would have all the consequences that I have explained. 
Companies are telling us that they want binding clearance, they want to come to us only when they are in doubt, they want the procedure to be speedy and they want it to be always carried out by the same unit in the Revenue so that there is consistency. That is precisely what we propose. The hon. Gentleman's new clause is not necessary to provide the certainty, security and support that companies seek. Indeed, it would have every danger of becoming a bureaucratic and unwieldy regime.

Christopher Huhne: I am interested by the Paymaster General's line of argument, because it is entirely open to the Revenue to move more rapidly than is suggested in any provision laid down in the legislation. Given the line of argument that she is developing, perhaps she would like to put something on the record about the normal time scale that she would advise the Revenue to apply in responding to requests made under the informal procedure that she proposes.

Dawn Primarolo: That was covered on Second Reading by my hon. Friend the Financial Secretary. 
The Revenue will have finite resources. If there is a statutory regime for clearance where even schemes that do not need it, because they are perfectly straightforward and no dispute is involved, go into that system and resources are consumed, the choice is a longer delay or not to do something else in the tax system. 
We have sought to give everything that businesses required from this regime and to target it effectively by saying that where they are uncertain and therefore are asking for formal clearance, it is provided. 
On the argument relating to the appeals procedure in new clause 2, the hon. Member for Runnymede and Weybridge is quite right: I am bound to say that the appeals mechanism that would be inserted by that new clause is based on a fundamental misunderstanding by those who drafted it for him of the way that notices and self-assessment work. If a company is served a notice and does not think that it is caught by the legislation and has not operated any of the mechanisms that are available to it, it does not have to do anything. The notice does not bring anything into charge. It simply requires a company to take account of the arbitrage legislation when making its self-assessment. 
 If HMRC disagrees with that self-assessment on the arrangements, it must challenge using the existing self-assessment provisions, which already contain an appeal route to protect the company. I should also point out that new clause 2 would give rise to uncertainty were it be adopted, as it refers to terms not used elsewhere in the arbitrage legislation. In particular, it refers to changes that are ''directed to be made''. As I have mentioned, notices issued by HMRC will not direct that changes must be made. They prompt on the basis of the arbitrage legislation. 
New clause 1 is not necessary because all the arrangements that the hon. Gentleman seeks are in place: there is speedy resolution, an appeals procedure in terms of asking for pre-clearance, and a guarantee that the decision from the Revenue is binding. In addition, the appeals procedure is in place in relation to the self-assessment. I ask a simple question: why duplicate? The new clause is not necessary and therefore the Government are not minded to accept it. 
Question put and agreed to. 
Clause 28, as amended, order to stand part of the Bill. 
Clauses 29 and 30 ordered to stand part of the Bill. 
Further consideration adjourned.—[Mr. Watson.] 
Adjourned accordingly at twenty-nine minutes past Five o'clock till Tuesday 28 June at half-past Ten o'clock.